Maggie Fleming is a director of Isis Financial Planners. Isis offers independent specialist financial advice to the gay and lesbian community. For more information on the financial aspects of the Civil Partnership Act see: www.civil-partnerships. info .
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There cannot be many in the gay community who are unaware that, come December, we will be able to gain legal recognition of our relationships by entering into ‘civil partnerships’. Make no mistake about it – whatever Parliament has decided to call the arrangement, this is, to all intents and purposes, gay marriage.
From now on, lesbian and gay couples will have to ask themselves the same questions that straight couples do – should we enter into a civil partnership or just live together? What are the financial and legal implications of civil partnership? What are the advantages and what are the drawbacks?
Many of my clients have already booked their slot at the register office but many others are still weighing up the issues. So, what are the pros and cons? Let me say at the outset that, for the majority of people, the advantages far outweigh any drawbacks.
Take tax, for example. As I pointed out last month, the tax system has been very unfair to gay couples in the past. Where inheritance tax was concerned, the survivor of a lesbian or gay couple could find themselves facing a huge tax bill when their partner died because they could not claim the spouse exemption which married people could. Now, that will change. If you register your civil partnership and one of you dies, leaving everything to the survivor, the survivor will not have to pay any tax at all, no matter how large the inheritance. The only exception to this is where one of you is not domiciled in the UK (the same rule also applies to married people) and couples where one partner is from overseas should seek specialist advice on this matter.
This extension of the spouse exemption to registered civil partners is something that will make a change to many people’s lives and lift the cloud of anxiety that has hung over many older couples, especially those with modest savings but with a home that has multiplied in value over the years. No longer will the survivor have to sell the house in order to pay the tax bill.
The capital gains tax inter-spouse exemption will in future apply to civil partners in the same way that it now applies to married couples. It is often tax efficient for one partner to gift the other a share in an asset before it is sold on to a third party. This is mainly because each co-owner of the asset is entitled to their own CGT exemption – currently £8,500 – and therefore, if two people own the asset jointly, the first £17,000 is exempt from tax, rather than just the first £8,500. Furthermore, by splitting a large gain in two, it is likely that less of it will be taxed at the highest rate of 40%. This is a tax mitigation strategy that married couples have always used but it has not previously been available to same-sex couples. Previously, if a gay man gave his partner a share in (for example) an investment property, he would be liable to CGT on the gift, so there would have been no point to the exercise. But now, once they are registered civil partners, they can gift assets to each other without any tax implications.
This is not just important when people are thinking of selling an asset. It may be sensible for couples to rearrange the ownership of their assets for income tax purposes too. If one of you is a higher rate taxpayer and the other is a basic rate taxpayer (or doesn’t pay tax at all) it makes sense for savings and investments to be owned by the person who pays less tax. Again, basic tax planning that married couples have always been able to use.
There are a couple of tax drawbacks to civil partnership. One concerns the CGT principal private residence exemption, which exempts any gain made on the sale of a person’s home. At present, if both partners in a same sex couple each own their own property, they can each claim the exemption when that property is sold. However, married couples have never been able to do this – they are treated as a unit for tax purposes and can only have one principal private residence between them. In future, if a same sex couple register as civil partners, they will be treated in exactly the same way as a married couple in this respect. A couple in this position has two years from registration in which to nominate one or the other of the properties as their main residence and should seek specialist advice on the matter.
Another drawback is that complicated anti-avoidance settlements legislation, designed to prevent people transferring income to their spouses in certain situations, will apply to civil partners in the same way as it does already to married couples. But these minor drawbacks are the price we pay for equality.
Apart from tax, there are some other areas where equality can have its disadvantages. One of the questions I’ve been asked a lot lately is about people’s benefits and tax credits. There is a widespread misconception about this. Some cohabiting same sex couples think that, by not registering as civil partners, they will continue to be treated separately, as unconnected individuals. This is incorrect. Again, the new law will introduce equality with heterosexuals – and that means that the co-habitation rules will apply. From this viewpoint, it will not matter if you and your partner register or not – if you are living together, you will be assessed as a unit. And, for many people, that is likely to mean reduced benefits and tax credits.
Pensions are another area where improvements have been made but work still needs to be done. The State pension will recognise civil partners but will only be back-dated to 1988, so any entitlement earned prior to this won’t count. The Act doesn’t require trustees of private pensions to recognise civil partners although some already do. It remains to be seen how many schemes, including the statutory schemes (NHS, Teachers etc) will react to the changes.
There are also a number of legal implications to be considered. For example, if you and your partner have wills, they will be revoked automatically when you enter into a civil partnership – just as has always been the position on marriage. If nothing has changed in your financial affairs since you wrote the wills, it may just be a simple matter of redating and resigning them and getting them witnessed. If you are thinking of drafting wills now but don’t want to have to do fresh ones after registration of your partnership, you can include special wording to take account of this - your solicitor can arrange this for you.
And while you are at your solicitor’s office, you may want to discuss a pre-civil partnership agreement – a same-sex version of the pre-nuptial agreement. Nobody wants to think about the possibility that their partnership may be dissolved some way down the road but it is a good idea to make sure that your financial interests are protected and each of you knows what he or she is entitled to in the event of a split. Dissolving a civil partnership will follow the same rules currently applying to divorce and these issues will need to be fully understood.
But let’s not end on an unhappy note. If you are planning a civil partnership ceremony, this may be the time to remind rich relatives that gifts made in consideration of marriage are exempt from inheritance tax! Each parent can give up to £5,000, while grandparents can give up to £2,500 each. Other relatives can give up to £1,000. Now, that’s what I call tax planning!
The financial advisers at Isis Financial Planners have been advising gay men and lesbians for over 10 years and we see the Civil Partnership Act as offering the best opportunity to sweep away the discrimination outlined in this and last month’s article. However, as discussed in this article, all rights come with obligations, and same-sex couples should examine carefully the pros and cons before deciding if becoming Civil Partners is right for them. Isis Financial Planners would be happy to help you assess your personal circumstances and recommend how registering as Civil Partners would affect you financially.
Maggie Fleming is a director of Isis Financial Planners. Isis offers independent specialist financial advice to the gay and lesbian community - see our contacts page. For more information on the financial aspects of the Civil Partnership Act see: www.civil-partnerships. info .
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