Tax is certainly not the most romantic element of your civil partnership planning, but it is an important one. When considering marriage and civil partnership status, most couples are looking for a legal definition of their relationship. This includes the financial aspect and there are several tax advantages to being in both, that you are not entitled to as a couple that simply lives together.
Here we have put together a quick rundown of the basic pros and cons concerning your tax position in a civil partnership.
What negatives are there?
Let’s get the bad news out of the way first. It’s worth talking through your entire financial position with a professional before committing to your civil partnership because there are possible negative impacts. One example relates to identifying the principal private residence tax exemption when selling properties. If you are both selling a property and you are married or in a civil partnership, only one of the properties qualifies for this tax exemption. If you are simply living together, this would not be the case.
On balance, there are more positives than negatives, but planning carefully can help you minimise any downsides.
What are the tax benefits to being in a civil partnership?
As with anything ‘tax’, your whole financial position needs to be considered to get a completely accurate picture – preferably by a professional. But there are some tax rules that apply across the board to those in a civil partnership.
Here are the four big ones:
Capital Gains Tax
You can transfer assets to your civil partner (or married spouse) without having to pay Capital Gains Tax. This is called ‘spouse exemption’ and one of the only stipulations is that you are living together. If you are a couple and only cohabiting, you would not be eligible for this exemption and will have to pay Capital Gains Tax on any asset transfers.
As a civil partner, you can claim for Married Couples Allowance. If one partner earns less than the Personal Allowance amount and the other is paying income tax, you can transfer the unused Personal Allowance to the higher earning partner. This can be up to £1,190 and enables the family to benefit from a reduction in total income tax payments.
Planning for death is a significant way for people to minimise that trauma for their families. Inheritance tax can be a huge unexpected burden. If you are in a civil partnership (or marriage), the surviving partner can inherit your estate without being subject to Inheritance Tax. This is an unlimited exemption if both partners are living in the UK. If one partner is living abroad, there are some restrictions on this exemption.
Without civil partnership, or marriage, status, you face paying Inheritance Tax on everything over £325,000.
Dying without a will
If you do not have a will, anything you leave behind after your death is distributed according to the rules of intestacy. This can lead to some incredibly unfair situations for surviving cohabitees that do not have the legal protection of civil partnership (or marriage). As it stands, a civil partner or spouse will automatically inherit their partner’s estate, with allowances for their children. There is no such rule for those living together, unless there is joint property ownership.
Are there any differences between marriage and civil partnerships?
The tax rules are more or less the same for those who choose marriage or civil partnership. At the moment, there is discussion about making civil partnership accessible to straight, as well as gay couples. Because the other differences can carry great meaning. Such as:
- There is no mention of consummation in a civil partnership
- You do not need to exchange vows as part of a civil partnership ceremony]
- An ‘irretrievable breakdown’ of a civil partnership cannot solely be put down to adultery
- On civil partnership certificates, both parents’ names of each civil partner are recorded. This is just the fathers’ on a marriage certificate.
We appreciate that it’s not as exciting as choosing outfits or honeymoon destinations, but it’s worth adding ‘see tax professional’ to your list of preparations. It has taken a lot of persistent work to get to this stage of legal equality and everyone should have all the knowledge they need to maximise their own tax position within their civil partnership.