Civil partnerships - tax, tax credits and benefits

Published on 3 November 2005

In this information article we have outlined the basic changes in tax, tax credit and benefits which will take place when the provisions of the Civil Partnership Act 2004 (CPA) come into force in December 2005. Of necessity we can only cover the essential details of the areas most likely to be affected. We have looked at tax and benefits separately summarising briefly for each how the rules will work.

What is a civil partnership?

A civil partnership is a relationship between two people of the same sex ("civil partners") - which is formed when they register as civil partners of each other 
in England, Wales, Scotland or in Northern Ireland, or outside the United Kingdom under an Order in Council (registration at British consulates etc. or by armed forces personnel), or which they are treated as having formed on the basis of having registered an overseas relationship.

Two people are not eligible to register as civil partners of each other if-

(a) they are not of the same sex,
(b) either of them is already a civil partner or lawfully married, 
(c) either of them is under 16, or 
(d) the relationship is prohibited

 

A civil partnership ends only on death, dissolution or annulment.

Tax & Civil Partnerships

The Civil Partnership Act 2004 (CPA) provides a means for same-sex couples to have their relationship legally recognised if they so wish. Civil partners formed as a result of the Act will be treated the same as married couples for tax purposes.

In addition, those same-sex couples who are not in a civil partnership but are living together as if they were civil partners will be treated in the same way as unmarried opposite-sex couples who are living together as husband and wife.

Under existing law, married and unmarried couples are usually treated differently for tax purposes. Husbands and wives can transfer assets between themselves generally on a tax free basis unlike unmarried couples. Basically tax recognises marriage in a way that does not apply to cohabitation, and this feeds through into the tax treatment of the two entities, both in terms of reliefs/exemptions and in terms of anti-avoidance and other restrictions.

The following tax changes will take effect from 5 December 2005 - the date the CPA comes into force:

Inheritance Tax (IHT)

Transfers between married couples in lifetime or on death are generally exempt from IHT without limit, where each spouse is domiciled in the UK. Equally, civil partners will be able to make gifts or bequests to their partners with the benefit of IHT exemption.

All other IHT rules that apply to husband and wife will also be applicable to civil partnerships including any anti-avoidance provisions that apply to marriage.

Capital Gains Tax (CGT)

CGT will apply to a civil partnership in exactly the same way as a married couple. There are a number of specific areas worth mentioning in this respect:

* Your home - only one property owned by a couple, whether that property is owned solely or jointly, may be treated as the main private residence of either of you at any time for CGT purposes and so qualify for relief by being tax free on any sale or other disposal.

* Transfers of assets between persons who are civil partners who are living together will be on a no-gain no-loss basis, and so will not be immediately chargeable to CGT.

* For CGT purposes civil partners will be connected persons for tax purposes in the same way as husbands and wives. They will also similarily be connected with certain other people, for example any close relatives of their civil partner.

Bank and building society interest paid to individuals

Banks and building societies are required by law to deduct tax at the lower rate (20%) before paying interest to savers, unless they have authority to pay the interest gross, that is, without tax taken off.

From December 2005, the ability to sign the registration declaration (on form R85) on behalf of a person who lacks the mental capacity to operate their own bank or building society account will be extended from married couples to include civil partners.

Occupational Pension Schemes

The current pension tax legislation will be amended so that references to husband, wife, ex-husband, ex-wife, spouse, ex-spouse, surviving spouse, widow, widower will include civil partner, former civil partner and surviving civil partner under the terms of the CPA. When new rules about taxation of pensions come into force in April 2006 these will also include reference to civil partners.

Joint ownership

Married couples often own property in their joint names and for tax purposes they are treated as though the property is held equally so any income arising is taxed 50/50.

However, if the couple are not in fact entitled to half the income each, they can generally elect to have income from property they hold jointly taxed on a basis other than 50/50. Civil partners will be treated in exactly the same way.

Married couple's allowance

Married couple's allowance is currently available to married couples where one of the spouses was born before 6 April 1935.

Civil partners will have similar rights so that from the date that the registration scheme commences, civil partnerships and also new marriages meeting the age criteria will have an allowance based on the income of the highest earner. There will be no change to the arrangements for existing marriages.

Blind person's allowance

Any unused Blind Person's Allowance (BPA) (because the person does not have sufficient income) can be transferred by a husband or wife to their spouse. From December 2005 it will also be possible to transfer surplus BPA to a civil partner.

Tax Credits, Benefits & Civil Partnerships

The current position

Same-sex couples are not currently recognised under the tax credit or benefit system. At present only opposite sex couples who are either married or living together as if they are married are recognised. Members of a same-sex couple are treated as individuals for benefit purposes.

As a result of this individuals who are part of a same- sex couple face some disadvantages under the benefits system. For example, if they claim State Retirement Pension or Incapacity Benefit they cannot claim an adult dependent increase for their partner.

However that is not to say that they are wholly disadvantaged. In some situations same-sex couples may be better off than their opposite-sex couple counterparts. The essential point here is that two people who are pooling their resources are deemed less in need of state support than two single persons in exactly similar circumstances.

The tax credits & benefits system after 5th December 2005

From 5th December 2005 (the date that the Civil Partnership Act 2004 comes into force) the tax credits & benefits system will change so that civil partners or those living together as civil partners will be recognised for benefit purposes. The remainder of this article explains the main changes.

Tax Credits

Tax credits assess your award based on combined income if you are part of an opposite-sex couple. Therefore married couples and those living together as if they were married are required to make a joint claim.

A single person can only make a single claim, and a couple can only make a joint claim - so single entitlement ends if claimant enters a relationship, and similarly joint entitlement ends if claimants are no longer a couple.

At present members of same sex-couples make individual claims. After the 5th December 2005 this will change and those who are civil partners or living together as civil partners must, by law, inform HM Revenue and Customs (HMRC) of their circumstances. A joint claim will then be made. This means that your tax credits will be calculated based on your combined income. From 5 December 2005 civil partners or those living together as civil partners will have to make their claim as a couple.

The change in legal status of civil partnerships and cohabiting same-sex couples is treated as a change of circumstances for tax credits, even though there may be no actual change in the couple's living arrangements either side of 5 December 2005. But the deemed change of circumstances must be reported to HMRC within three months. If it is not reported, HMRC may by law seek a penalty of up to £300, but it is understood that HMRC will take a lenjent approach to the question of penalties provided the couple truthfully disclose their status in their renewal papers.

Any overpayment which arises from claimants' failure to report their couple status is recoverable at the Revenue's discretion, but in a compliance case (i.e. where the couple status is picked up on examination or enquiry) the Revenue may allow the couple to set any tax credits they would have received as a couple, had they claimed at the proper time, against the overpayments accruing to each partner. It is not yet clear whether the same applies in the case of voluntary disclosure.

HMRC have explained these new rules in their Summer 2005 tax credit update which should have been sent to all claimants. This can be found here.

Income Support, Income based Job Seekers Allowance and Pension Credit

Summary of changes

Civil partners or those living together as civil partners will be assessed jointly in the same way as are married people (or those living together as if they were married). This means that both incomes will be used in the calculations.
Civil partners or those living together as civil partners will receive the couple rate of a personal allowance instead of two individual single personal allowances.
This joint assessment will apply to all new claims made on or after 5th December 2005.
For those who have existing claims the new rules will also apply from the 5th December 2005. There are no transitional protection arrangements (i.e. a period after this date during which you can inform the DWP of your Civil Partnership status) therefore you must inform the DWP as soon as possible if you have registered as civil partners or if you are living together as civil partners.
However it appears that the DWP have indicated that they do not intend to recover overpayments from before the point at which people could reasonably be expected to realise that the new rules apply to them. 'Reasonable' has no easy definition and will depend on the circumstances of each case, therefore it is important that you inform them as soon as possible of your relationship.

 

The above changes may mean that some couples receive less benefits. For example...

If both of you have been claiming Pension Credit at the single rate you will now receive the couple rate. For a couple where you are both under 65 this will mean a loss of £51.85 per week.
Similarly if you have both received Income based JSA at the single person rate (£56.20) you will now be treated as a couple and receive the couple rate of £88.15. This will mean you will lose £24.25 per week.
If you both have a disability and were both claiming JSA as single people then you may have both received the disability premium (£23.95 for a single person). You will now re-assessed as a couple which means you will only receive one disability premium at the couple rate (£34.20). This potentially means you could be £37.95 per week worse off.

 

Similarly if you currently claim any of these means tested benefits as a single person you may find that you will be no longer entitled once your partner's income is included in the calculation.

Housing Benefit & Council Tax Benefit

Again from 5th December 2005 civil partners or those living together as civil partners will be assessed for housing benefit and council tax benefit jointly as a couple. This means that you may be entitled to more or less housing benefit and council tax benefit depending on your circumstances.

However, it appears that local authorities have been advised by the DWP to take a gradual approach to changing housing benefit and council tax benefit.

For those couples who are receiving housing benefit and council tax benefit because they receive a 'passporting' benefit (Income Support, Income based Job Seekers Allowance or Guarantee Pension Credit) the new rules will be applied to your housing benefit and council tax benefit from the date that they are applied to your passporting benefit. In most cases this will avoid any overpayment of your housing benefit and council tax benefit.

For those couples who are receiving housing benefit and council tax benefit not involving any of the above passporting benefits, the new rules will be applied from the date the local authority become aware of a case. This could be due either to you reporting a change of circumstances, or to intervention by the local authority under the current review procedure.

State Retirement Pensions

From 5th December 2005 there will also be changes to the rules regarding State Retirement Pensions. Civil partners will enjoy most of the same state pension rights as husbands and they will be treated the same as husbands and wives after 2010 when the treatment of men and women will be equalised.

If a couple are over state pension age and one of them dies, the surviving partner will be able to access their partner's state pension provision to boost their own pension entitlement.

If a couple are under state pension age and one of them dies, the surviving partner will be entitled to claim bereavement benefit.

This also means that the courts will have the same pension sharing powers as they do currently for divorce when dissolving a civil partnership.

Civil partners or those living as civil partners will also be entitled to claim an adult dependent increase on their state retirement pension if they meet the criteria for doing so. There are also changes to contracted out, public service pension schemes which mean that civil partners will be entitled to a survivors pension. This will also apply to non-contracted out schemes which currently pay survivor benefits to widows and widowers.

Other Benefits

From 5th December 2005 civil partners will be entitled to claim adult dependent increases for their partners. This applies to benefits such as Carers Allowance and Incapacity Benefit, Maternity Allowance and State Retirement Pension.

Civil partners will also be able to claim bereavement benefits such as Bereavement payment, widowed parent's allowance and bereavement allowance providing they meet the other conditions of entitlement.

As you can see there are going to be many changes for those who register as civil partners or who live together as civil partners. This article only gives brief details as to the position after 5th December 2005. It is important that you inform the DWP, HMRC or your Local Authority as soon as possible if you may be affected by any of these changes. If you are unsure about how you will be affected then you should seek professional advice from your nearest advice agency such as Citizens Advice.

Contact Name: Sue Jones (tax)/Victoria Todd (benefits) (Tel: 0844 579 6700; Fax: 0844 579 6701)

(03-11-2005)