February 18th, 2019 / Insight posted in Articles

Heterosexual civil partnerships: the tax angle

The Prime Minister’s announcement that civil partnerships between heterosexual couples will be legally acknowledged will have a potentially profound impact on millions of people. This decision follows the Supreme Court’s ruling in June that legislation providing that only same sex couples may register civil partnerships is unlawful.

There are approximately 3.3 million unmarried couples living together in the UK who share financial responsibilities; around half of whom have children. Up to this point, and despite sharing many of the financial and moral obligations as married couples or those in same sex civil partnerships, heterosexual couples who choose not to marry do not enjoy the same legal rights and tax benefits.

Once the legislation is enacted there are four main ways in which cohabiting couples can benefit by registering a civil partnership.

Rights under the intestacy rules

When someone dies without leaving a Will, the intestacy rules which govern the devolution of the deceased’s estate do not provide for their cohabiting partner. For example, where the home in which the couple lived is held in the deceased’s name, the surviving partner would have to rely on the complicated laws of equity to claim a right to the property. If the property is held as tenants in common, the deceased’s share of the property would pass to their family – who could choose to sell what had been the couple’s home.

If the couple were to register a civil partnership, the surviving partner would be in a far stronger position. Where there are no children, the partner would inherit the entire estate outright. If there are children, the surviving partner takes the first £250,000 and the balance is divided between the surviving partner and the children.

Gifts between civil partners

Lifetime gifts and Will legacies between civil partners are exempt from inheritance tax, which is not the case for cohabiting partners. In the former case this means the surviving partner can inherit the deceased’s entire estate free of inheritance tax. In the example of cohabitation, assets over £325,000 will typically be taxed at 40 per cent if the estate passes to the surviving partner.

If the deceased’s entire estate is passed to their civil partner, then 100 per cent of the former’s tax-free allowance also passes to the partner’s estate. This means that if the value of the allowance were to increase during the period between the deaths of both partners, the total value of their combined estates that will pass free of tax will be greater than if they were not married or in a civil partnership.

Where someone has an estate worth more than £325,000 and would like to make a gift to anyone other than their partner in their Will, they may consider passing the gift to the surviving civil partner in the first instance. The partner could then honour the gift during their lifetime and, if the partner survives seven years from the date of the gift, the value of the gift would pass to the recipient free of any inheritance tax.

Capital Gains Tax annual allowance

Where an individual holds an asset with significant in-built gains, and which they want to sell or give away, they could give a proportion of the asset to their civil partner – who would then receive the asset at the cost it was acquired by the donor. Both partners could then take advantage of their annual capital gains tax (CGT) allowance (currently £11,700) to reduce the value of the tax liability when selling or giving away the asset.

Caution should be exercised where cohabitees own separate properties. While they remain unmarried and not in a civil partnership, they may each dispose of a property with no charge to CGT using the principal private residence (PPR) relief. A married couple or a couple in a civil partnership may elect for PPR to apply to one property only.

Continuation of pension payments

Depending on the terms of the pension scheme, a civil partner may be entitled to receive payments after the death of the policy holder. These payments are unlikely to be available to a cohabitee.

This article was first published in ePrivate Client on 15 October 2018