Thinking of entering into a civil partnership? Make sure you understand the tax consequences – both positive and negative!

Published on 25 February 2020

Following a successful legal challenge, it is now possible for opposite sex couples to form a civil partnership in England, Wales and Northern Ireland, with the law in Scotland expected to follow shortly. The government expects up to 84,000 opposite sex couples to form civil partnerships this year as a result of the change. In this article, we explain the tax consequences of entering into a civil partnership.

book cover displaying civil partnership wording

Civil partnerships were introduced for same-sex couples in 2005. When same-sex marriage became possible (initially in England and Wales from March 2014), same-sex couples had a choice between marriage and civil partnership, but opposite-sex couples did not have the same choice. The Supreme Court held that the inequality of choice was contrary to the European Convention for the Protection of Human Rights and Fundamental Freedoms. In order to correct this, civil partnerships are being extended to opposite-sex couples. Broadly speaking, for tax purposes a civil partnership is treated the same in law as a marriage.

There are many tax advantages to entering into a civil partnership and we set out the main ones below. We also discuss some lesser known disadvantages. However, please note that this is not an exhaustive list – nor do we wish to suggest that tax should be the only deciding factor! It is important to take advice on your own particular circumstances before making any decisions.

In this article, we focus on civil partnerships. However, note that all the advantages and disadvantages described below apply equally to married couples.

Advantages

The marriage allowance

The married couple’s allowance

Transfer of the blind person’s allowance

Transfer of assets with no capital gains tax or inheritance tax

Disadvantages

Tax on income from jointly-held property: less flexibility

Living separately: only one main residence per civil partnership or marriage

Stamp Duty Land Tax Surcharge

Note: certain overseas relationships, such as the Spanish ‘pareja de hecho’ and the French ‘pacte civil de solidarité, are treated as a UK civil partnership with effect from the law coming into force in the relevant part of the UK.

The marriage allowance

This was introduced on 6 April 2015 and, despite the name, is available to all married couples and civil partners. You may be able to claim it if:

  • Neither civil partner was born before 6 April 1935, and
  • one civil partner pays tax at a rate not higher than the UK basic rate (or intermediate rate if they are a Scottish taxpayer), and
  • the other civil partner does not use all of their personal allowance (and is not taxable at a rate higher than the UK basic rate or the Scottish intermediate rate, if relevant).

When it is claimed, the idea is that the civil partner with the lower taxable income gives up 10% of their personal allowance and then the recipient partner receives a tax credit which can be set against their tax liability – so reducing the amount of tax they pay. For 2019/20, this will reduce their tax bill by up to £250.

It is important to note that the recipient partner does not have their own personal allowance increased as a result of the claim.

You can find out more information about the marriage allowance, including an example, in our guidance. Note that a marriage allowance claim may not always be beneficial!

You can apply for the marriage allowance on GOV.UK. If you cannot claim online, you can telephone HMRC on 0300 200 3300 or otherwise use our marriage allowance letter template.

The married couple’s allowance

In contrast to the marriage allowance, the married couple’s allowance sounds very similar but is actually different. However, like the marriage allowance, note that it is not restricted to married couples but also available to civil partners. It is only available where at least one civil partner (or spouse) was born before 6 April 1935.

The married couple’s allowance works by giving the person who claims it a reduction against their tax bill, like the marriage allowance. The amount of the reduction is 10% of the full allowance. For 2019/20, the maximum allowance is £8,915, reducing to £3,450 depending on income. This means that the married couple’s allowance can knock off up to £891.50 from one civil partner’s tax bill. The allowance can be transferred to your civil partner if your tax liability is too low to make use of it.

Note that the married couple’s allowance is more beneficial than the marriage allowance. Couples who are eligible for both may only claim one or the other – but it is usually in the taxpayer’s interest to claim the married couple’s allowance if it is available.

You can read more information about the married couple’s allowance, including how to claim it, in our guidance.

Transfer of the blind person’s allowance

The blind person’s allowance is available to individuals (whether in a civil partnership or marriage, or not) if you are registered blind – or otherwise, if you live in Scotland or Northern Ireland, your sight is so bad as to stop you performing any work for which eyesight is essential. It works as an extra amount which is added to your personal allowance, so it increases the amount of income you can earn before starting to pay income tax.

For 2019/20, the blind person’s allowance is £2,450. If you are a basic rate (20%) taxpayer, this will reduce your tax bill by up to £490.

You can find out more about eligibility for the blind person’s allowance here.

If you are entitled to the blind person’s allowance but your income is too low to make full use of it, entering into a civil partnership with your partner will enable you to transfer the surplus allowance to your partner for income tax purposes. We publish further information here.

Transfer of assets with no capital gains tax or inheritance tax

Entering into a marriage or civil partnership will mean that you will be able to transfer assets to your civil partner without triggering either a capital gains tax or inheritance tax liability.

Capital Gains Tax

For capital gains tax purposes, being able to transfer assets free of capital gains tax can be a way of ensuring that each civil partner’s capital gains tax annual exemption is not wasted prior to the disposal of an asset. The annual exemption is the amount of gains which an individual can make before needing to pay capital gains tax. For 2019/20, the amount is £12,000.

For example, if one civil partner owns an investment property which is worth £300,000 and was purchased for £200,000, the potential gain is £100,000. If the property is sold, after deducting the annual exemption and assuming no other chargeable disposals in the same tax year, this means that £88,000 is charged to capital gains tax at the relevant rates. However, if 50% of the property were to be transferred to the other civil partner prior to disposal, it can be possible to take advantage of two annual exemptions – thus reducing the overall gain charged to capital gains tax from £88,000 to £76,000.

Note that, in addition, there is no stamp duty or stamp duty land tax on gifts between civil partners.

Inheritance Tax

Each individual has a nil-rate band for inheritance tax purposes. For 2019/20, this is £325,000. From 6 April 2017, this is extended where the deceased leaves a residence (or the sale proceeds of a residence) to his or her direct descendants. For further details, please read our guidance.

If an individual dies leaving an estate worth more than their nil-rate band, then inheritance tax is normally payable at 40% on the excess.

Civil partners have an advantage over other couples not in a civil partnership or marriage in that:

  • On death, assets can be transferred to the surviving spouse free of inheritance tax, provided that the surviving civil partner is domiciled in the UK, and
  • The surviving civil partner can inherit any unused portion of the deceased’s civil partner’s nil-rate band (and main residence nil-rate band).

Where the deceased civil partner leaves their entire estate to the surviving civil partner, the broad effect is that the couple’s assets are assessed jointly for inheritance tax purposes against a double nil-rate band. Including the main residence nil-rate band, this means that  those in a civil partnership can leave an estate worth up to £950,000 (increasing to £1 million from April 2020) to their descendants without paying any inheritance tax.

By contrast, couples not in a civil partnership or marriage are treated entirely individually for inheritance tax purposes. Therefore, if a member of such a couple dies and leaves their estate to the surviving partner, and the value of the estate exceeds the deceased’s nil rate band, inheritance tax will be payable on the excess.

Those in a civil partnership are also able to make lifetime gifts to each other without such gifts being treated as ‘potentially exempt transfers’ for inheritance tax purposes. Gifts between couples not in either a civil partnership or marriage would potentially be charged to inheritance tax if the person making the gift dies within seven years from the date of the gift.

For more detail on the above, please refer to our guidance.

Tax on income from jointly-held property: less flexibility

Couples who are not married and not in a civil partnership who are joint owners of property which is let out may agree any split of property income between them (assuming the property is not let as part of a partnership business), even if this is different from the share owned in the property being let. They would then be taxed accordingly on that split and no formal election is required, though it would be sensible to record the agreement in writing.

By contrast, where the joint owners of a let property are civil partners, the share of any profit or loss will be treated as arising to each owner in equal shares by law, even if the underlying beneficial entitlement is unequal (for example, if only one civil partner funds the purchase of the property). However, you may both elect, on form 17, to be taxed in accordance with your respective beneficial interests instead, if these are unequal.

Therefore, this is a case in which couples who are not in a civil partnership or marriage actually have more flexibility when it comes to splitting rental income from jointly-held property. This could translate to an overall tax saving if, by agreeing a certain split of income, better use can be made of tax allowances and lower rate bands.

Note that the position relating to the taxation of interest on joint bank accounts is slightly different where the joint account holders are not in a civil partnership or marriage. In this case, each partner is taxed on the share of interest to which they are entitled. In most cases this will be 50:50, even if contributions to the account are unequal.

Interest paid on joint bank accounts held by those in a civil partnership or marriage will, as in the case for jointly-held property, be taxed in equal shares by law unless an election is made to be taxed in accordance with beneficial interests instead (if this is different).

Living separately: only one main residence per civil partnership or marriage

Another possible disadvantage of being in a civil partnership or marriage is that you may only have one property which qualifies for private residence relief between you at any one time (subject to exceptions in certain circumstances), even if you live separately.

Private residence relief is a very important relief from capital gains tax where an individual sells a property which has, at some point, been their main residence. For more information, please refer to our guidance.

By contrast, couples who are not in a civil partnership or marriage may each have their own ‘main residence’ if they choose to live separately.

Stamp Duty Land Tax Surcharge

We mention above that there is no stamp duty land tax on transfers of property between civil partners or married couples. This is because members of a civil partnership or marriage are effectively treated as one person for stamp duty land tax purposes.

This can be a disadvantage as well as an advantage when it comes to the stamp duty land tax surcharge. This can apply if you are buying an additional residential property which is not replacing your main residence.

A couple in a civil partnership or marriage would be subject to the higher stamp duty land tax cost if either party owns another residential property and the couple is not replacing their main residence.

By contrast, couples who are not in a civil partnership or marriage are treated separately – even if they live together. This means that an individual in such a partnership may buy a residential property without paying the surcharge if they do not already own a residential property themselves – even if their partner does.

(25-02-2020)

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