On 5 December a major change in the law will allow couples of the same sex –
either two men or two women – to register their partnership and obtain
essentially all the rights and responsibilities of marriage. For many that will
remove tax worries about inheritance or gifts. But for same sex couples who
claim means-tested benefits or tax credits the change is not such good news –
they may end up with less. Overall, the Treasury estimates that it will lose £5
million a year in tax revenue due to the new act.
This change also has raised the question of unmarried opposite sex couples. In
England and Wales there is no such thing as a ‘common law marriage’. Unmarried
couples have no rights over each other’s property however long they have lived
together – even if they have had children. When the new rights for same sex
couples – which apply throughout the UK – were announced, many unmarried couples
asked ‘what about us?’ The Government’s answer was that if they wanted the
rights of married people then they could get married. That option did not exist
for same sex couples and civil partnership will fill that gap.
However, the Law Commission announced earlier this year that it was considering
whether unmarried partners living together in a long-term relationship should be
able to leave property to each other free of inheritance tax or have rights to
share each other’s property when their relationship ends. A consultation paper
is expected early next year.
In Scotland the law is different. A man and a woman who live together and are
known as a married couple can become legally married without a ceremony by
‘cohabitation with habit and repute’, as long as they are both free to marry.
That can give them rights on separation and when one dies the other can inherit
free of inheritance tax.
Partnership
From 5 December same sex couples throughout the UK can apply to any Register
Office to become civil partners. People who are too closely related to marry
cannot become civil partners. The registrar will perform the ceremony, normally
after a delay of at least seven days. The procedure cannot have any religious
aspect to it. Like a marriage, a civil partnership can only be brought to an end
by the courts. The grounds for dissolving a civil partnership are just about
identical to those for divorce and will take the same time. But unlike marriage
a civil partnership cannot be annulled if there has never been a sexual
relationship.
In general, same sex couples will be treated exactly as opposite sex
couples and rules that apply to married couples will be extended to registered
civil partners.
Inheritance tax
Married couples have great advantages over other people who share a home. When
one of them dies, their spouse can inherit all their estate with no inheritance
tax to pay. That rule does not apply to unmarried couples and so does not
currently apply to same sex couples. That can cause great hardship when one of
the partners dies. For example, if they share a home worth £400,000 and the one
who owns it dies, the second can only inherit £275,000 tax free. The balance is
taxed at 40% and so the survivor will face a tax bill of £50,000 just to stay in
their home.
From 5 December registered civil partners will be given the same rights as a
married couple for tax purposes. So they will be able to inherit property from
the other partner with no inheritance tax due. If a civil partner dies without
leaving a will, their partner will have the same rights as a widow or widower to
inherit their property under the intestacy rules.
However, there is a disadvantage in becoming civil partners if the couple own a
second home. A married couple have to nominate one of the homes as their main
residence. If the other home is sold then Capital Gains Tax may be due. The rule
applies whether the homes are owned jointly or whether each of them owns one of
the homes. The same rule will apply to civil partners. However, couples who are
not married or, in future, civil partners who own one home each will be able to
nominate their own principal residence and thus avoid Capital Gains Tax when
either home is sold.
When a substantial gift is made to someone, Capital Gains Tax may be due if the
value of the item has grown considerably since the donor bought it. For example
if someone gives a painting to their daughter which is worth £30,000 but for
which they paid just £1000, then the donor could have to pay Capital Gains Tax
on at least part of the £29,000 gain. However, if they gave it to their spouse
no tax would be due (but the spouse would be liable to pay enhanced CGT if they
then sold it). From 5 December this exemption will be extended to gifts between
civil partners. But anti-avoidance provisions which catch artificial
arrangements making use of the spouse exemption will also be extended to civil
partners .
Same sex couples will also find it harder to claim help with their council tax.
From 5 December same sex couples will have their income and savings counted
jointly instead of separately as they do at the moment – whether they become
civil partners or not. That will put them on the same footing as unmarried
opposite sex couples. They will also find their assets are counted jointly if
they apply for other means-tested benefits including income support, housing
benefit or pension credit. A similar change will apply to tax credits. Same sex
couples who currently get these benefits on a separate basis could find they
lose them or get less under the new rules.
Pensions
From 5 December a civil partner will be treated in all respects like a spouse
when the benefits paid with occupational or personal pensions are worked out. So
civil partners will have the right to get death in service payment or a
survivor’s pension or any of the other benefits currently paid to a spouse. Part
of the survivor’s pension (technically the ‘contracted out’ part) will have to
be worked out as if it had been built up since April 1988, but the rest will
normally accrue only from 5 December 2005.
It will take a lot longer to introduce similar provisions into the state
pension. At the moment the state pension still discriminates between men and
women and that will not end until April 2010. Civil partners will have to wait
for the same date before they are treated equally over state pensions. From that
date civil partners will be able to claim a dependency addition with their state
pension if their partner is under pension age and has little income of their
own. In addition, a civil partner who has reached pension age will be able to
claim a reduced rate pension on their partner’s National Insurance contributions
from April 2010, if they don’t have a full state pension of heir own.
State bereavement benefits will be paid to civil partners from 5 December on the
same terms as they are to a bereaved husband or wife.
Married couple’s allowance
The married couple’s tax allowance is only available where at least one member
of the couple was born before 6 April 1935. It is worth around £590 off the tax
bill and is normally allowed to the husband, though his wife can have £114 of it
if she asks and £228 of it if he agrees. However, from 5 December the allowance
will be extended to civil partners, where one or more is old enough, and the
rules for civil partners, as well as spouses who become entitled from that date,
will change. In future, the couple’s allowance will be available to the spouse
or civil partner with the higher income. The other partner can still have £228
by agreement or £114 without.
If a married couple has money in a joint bank or savings account the Revenue
will assume that half belongs to each of them regardless of who originally owned
the money. Half the interest will be allocated to each spouse when tax liability
is calculated which can be to their advantage. If it is not they can make a
declaration and have the money taxed in the correct proportion. From 5 December
the same rules will apply to civil partners.
The new relationship of 'civil partner' will extend the tax advantages enjoyed by married couples to same sex couples who register. Couples who have not formalised their relationship through marriage or civil partnership will have to wait for the Law Commission report to see if they are likely to share in these advantages in future.
November 2005