As of 31st December 2019, it’s now possible for both same-sex and heterosexual couples to enter into a civil partnership. The institution was initially devised solely for same-sex couples through the Civil Partnership Act 2004; it was meant to be a distinct separate relationship status for same-sex couples akin to (but separate from) a marriage. This has now changed – and moving into 2020, heterosexual couples may opt for a civil partnership instead of marriage.
There are a number of important points to note in view of this change in law. It’s right to say that a civil partnership offers a genuine alternative to marriage for heterosexual couples. In the key case of Steinfeld & Keidan, the landmark case in this area, the applicants emphasised the importance of couples having a secular alternative to marriage.
From a legal perspective, couples who opt to enter into a civil partnership should consider a pre-partnership agreement. These agreements, usually known as ‘pre-nups’, set out the terms of financial settlement on divorce, and can now can be drafted to apply in the context of dissolution of a heterosexual civil partnership. They still remain available to same-sex couples.
The drafting of this type of arrangement of course should be done to protect assets and provide clarity on what will happen if the couple separates. They aren’t legally binding, but they are heavily persuasive and help to mitigate the risk of contentious litigation should the couple separate. On this point, heterosexual couples who enter into civil partnerships should note that they are then, on separation, subject to the same principles as divorcing couples if an application to court is required to deal with financial issues. We expect a large number of pre-partnership agreements in the next few years and thereafter, given this recent change in the law as well as more awareness around the topic.
From a tax perspective, if couples are planning to enter into a civil partnership the rules relating to lifetime and death planning are much the same as entering into a marriage. No doubt they will have made Wills during the course of their relationship to ensure loved ones receive their estate in the way they choose. Unfortunately, the myth of attaining the status of a “common law partner” after living together for a long time is still perpetuated. If this is news to you; take note that it doesn’t matter how long you live with your partner, if you aren’t married or in a civil partnership and you don’t make a Will, then on your passing the intestacy rules govern where your assets will go. Only married or civil partners and some predetermined close relatives can inherit assets, and a cohabiting partner would get nothing.
So, if couples haven’t made Wills then serious consideration should be given to making them now rather than waiting for the big day. If a Will already exists for either partner, they should be aware of the effect of entering into a civil partnership has, as any existing Will is revoked on the day couples sign that contract. Careful drafting of the Wills can avoid this by including a clause stating that couples are making the Wills in contemplation of the civil partnership. They can also of course make new wills after to reinstate their testamentary wishes.
While couples shouldn’t let the tax tail wag the dog, there are valuable tax implications on entering into a civil partnership. The inheritance tax (IHT) and capital gains tax (CGT) implications are generally very generous as they are with married couples but, again, careful drafting of the Wills is necessary to lock in the additional inheritance reliefs available to civil partners.
For example, the surviving partner can claim the unused inheritance tax allowance of the predeceased partner, possibly doubling the amount of assets they can give away on death IHT-free. The status of any partner’s children would also change to stepchildren, possibly opening up a further additional relief previously unavailable to couples. This is known as the Residence Nil Rate Band, and between you could total a further £350,000. By carrying out estate planning using Wills, couples could have a combined Nil Rate Band of £1m to gift on death without an inheritance tax liability. That is a big jump from £325,000 and a significant tax saving when a 40% levy applies.
The change in the law is a big move for equality as well as opening up a new world of tax planning implications for couples, all of which should be considered if couples are now looking to enter into a civil partnership.
Published: January 2020
A monthly briefing from Irwin Mitchell
January 2020
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