Feature

posted 10 Oct 2005 in Volume 10 Issue 6

Sexuality and the law

Solicitor John Fawcett looks at the ramifications of the Civil Partnership Act 2004 and the extension of taxation benefits to same-sex couples.

The Civil Partnership Act 2004 (the Act) sets out a framework for the legal recognition of same-sex couples. The Act became law on 18 November 2004, but its provisions will only be brought into force and have effect from 5 December 2005.

What began on the 30 September 2003 as a Scottish Executive Consultation Paper on the devolved aspects of a civil-partnership registration scheme for same-sex couples led to the government publishing the Civil Partnership Bill on the 31 March 2004 – ministers having indicated at that time that it would take around a year to make the necessary changes to bring the Act into force.

The Act brings in major changes to the treatment of same-sex couples who wish to be regarded as living together in a legally recognised relationship. In some quarters, this has been referred to as a form of quasi-marriage. This creates a radical change to the legal and taxation treatment of same-sex couples and their finances.

The Act allows same-sex couples to legally register their relationship as a civil partnership from 5 December 2005. There is a fifteen-day waiting period for the registration of a civil partnership at a register office, so the first civil partnerships will take place and be formed on 21 December 2005. Early indications from same-sex organisations show that many couples are intending to legally register their partnership before Christmas, with services and celebrations akin to a wedding ceremony.

By entering into a civil partnership, same-sex couples will now be subject to important rights and responsibilities in their lives together. The Act makes provisions for employment and pension benefits; recognition on intestacy; fatal accidents compensation; recognition in immigration and nationality issues; a duty to provide reasonable maintenance for one another and any children of the family/relationship; civil partners to be assessable for child support in the same manner as spouses; and equal treatment for life-assurance purposes.

The new Act authorises changes to existing revenue legislation. Civil partnerships registered under the auspices of the Act will be treated for all tax purposes in the same way as married couples. The Act does not, however, alter the basic legal position that one partner does not have any ‘legal rights’ over their partners assets, finances or property.

It is important for professional advisers to note that the Act allows same-sex couples throughout the UK to enter into an agreement conferring on them the new legal status of civil partner. However, it is not the government’s intention to extend the acquisition and recognition of this legal status for a same-sex relationship to cohabiting (but unmarried) heterosexual relationships. Heterosexual couples who wish to be treated on a par with a married couple in matters of UK taxation will still have to go down the aisle or, more commonly these days, pop up the stairs to a hotel conference suite.

While same-sex couples have campaigned for many years to receive equal treatment and rights currently available to married couples, it is, more often than not, the right to be recognised as their partner’s next of kin and the erosion of discriminatory barriers that have received the greatest approval.

Couples who enter into a civil partnership will gain a package of rights and responsibilities. The government, through the board of Inland Revenue, states its beliefs that the tax system should: “…adapt to reflect the changes in society and [recognise] that there are implications in the tax system arising from the new legal relationship, which can be established under the Civil Partnership Act. Because civil partnership is a parallel status to marriage, the government’s policy is that civil partners should be subject to all the same legal rights and responsibilities as spouses.

“It is planned to lay two affirmative Instruments, one amending primary, the other with secondary legislation. This package will ensure that tax charges and reliefs and anti-avoidance will apply equally to married couples and civil partners and in each case those treated as such.”

It may be that the only other major difference between a civil partnership and marriage is the lack of necessity of consummation to effect legality.

Legal formalities
Same-sex couples wishing to take advantage of the act must formally register their relationship to have it legally recognised.

Same-sex couples will be able to register their civil partnership, and themselves as civil partners, from 5 December 2005. Both persons must be over 16 years of age, of the same sex, not already legally registered in a civil partnership, not legally married, and not within prohibited degrees of relationship (that is generally neither blood relatives nor in-laws). These new legally registerable civil partnerships have often, but incorrectly, been referred to as a same-sex marriage.

After the partnership has been registered it can only be dissolved or annulled in a manner similar to a traditional marriage, or by the death of one of the partners.

Changes in current taxation legislation
The following points highlight the main changes that will be brought to existing revenue legislation:

Inheritance tax
Exemption on transfer of assets:
Like unmarried cohabiting couples, same-sex partnerships were not previously entitled to the inheritance-tax exemption on assets passing between them, be that inter vivos or on the death of either partner. Registered civil partners will now be able to make provision within their will, which will attract a benefit similar to the inheritance-tax spousal exemption.

Capital gains tax (CGT)
Principal-private-residence relief:
The relief formerly applied to a property owned by either partner as their main residence. As a consequence, it was possible, subject to meeting the relevant criteria, for a relationship to have the benefit of two private residences where relief would be available. Now only one property owned by persons registered under a civil partnership may be treated as their principal private residence (either jointly or in the sole name of either partner) for CGT purposes.

No-gain no-loss transfers:
Unlike married couples, previously the no-gain no-loss basis for the transfer of assets between same-sex partners was not available. An immediate CGT charge would have arisen on relevant disposals. The Act now allows transfers of assets on a no-gain-no-loss basis between partners in a registered civil partnership, thus avoiding an immediate CGT charge.

Connected persons:
Civil partners will become connected persons for the tax treatment of disposals in line with spouses.

Income Tax
Married couples allowance:
Married couples will be entitled to claim the married couples income tax allowance where either spouse was born on or before 5 April 1935. The Act brings in similar rights for civil partners to those available to a married couple, based upon the earnings of the partner with the greatest income.

Blind persons allowance:
Surplus blind persons allowance will become transferable to a civil partner when the person eligible for the allowance has insufficient income to set against it.

Receiving bank interest paid gross:
Banks and Building Societies are required by law to deduct lower rate income tax (20 per cent) before they pay out bank interest, unless they have received the saver’s authority to pay the interest gross (that is, without income tax being taken off).

Any person receiving bank or building society interest can sign a gross registration declaration (Inland Revenue Form R85), obtained from their bank, to have their interest paid gross, without the deduction of savings-rate income tax, where they are a lower rate or non-tax payer. The Act authorises a registered civil partner to sign the form on behalf of a partner lacking the mental capacity to operate their own account.

Beneficial ownership:
Married couples frequently own property jointly and the Inland Revenue treats them as though the property is held equally, taxing each person jointly on the income arising. If the couple are not entitled to the income equally then they can elect to have it taxed on a different ratio.

Whereas married couples have been able to elect, under the Taxes Act 1988, to have income received from jointly-held property taxed otherwise than on an equal basis, this has not applied to non-married couples. The ability to make this election is now extended to civil partners.

Stamp duty
For married couples divorcing or seeking an annulment, there may be a resulting transfer of the marital home (from joint ownership) into the sole ownership of one of the ex-spouses, or the similar transfer of shareholdings. Such transactions have been exempt from stamp duty and stamp duty land tax. The Act now exempts those same transactions from charge if coming about under a civil-partnership dissolution or annulment.

Tests for ascertaining control of a company
Section 417 of the Income and Corporations Taxes Act 1988 defines who is classed as an ‘associate’ when identifying who controls a company. Currently this includes a husband or wife. The Act will now include a civil partner within that definition.

Transfering assets out of the UK
Sections 739 to 746 of the Taxes Act 1988 legislate on the tax treatment for transferring assets out of the UK by married people, to prevent income-tax avoidance by levying and income tax charge on the married person making the asset transfer where their spouse is involved in the transfer or there are associated operations involved. Civil partners will now be subject to the same provisions.

The practice of not normally taxing UK domiciled individuals under section 739 of the Taxes Act 1988 on the income of a non-domiciled spouse, where the spouse qualifies to fall outside the basis of the section 739 charge, will be extended to civil partners.

Settlements
Married couples are subject to the full force of anti-avoidance legislation when forming settlements and entering into declarations of trust. The Act extends this legislation in the same way to include civil partners.

Private and company pension schemes
Civil partners, former civil partners, and surviving civil partners will now be included in existing pension-tax legislation in the same way that spouses, ex-spouses and surviving spouses are included.

The Act will also bring about changes to the legislation on pension-tax simplification, which is due to take effect from 6 April 2006.

ISAs
The rules relating to ISAs will be amended so that a registered civil partner will be able to subscribe to an ISA account on behalf of a partner lacking the mental capacity to operate one themself.

Changes in other legislation
The Act also sets out amendments to current legislation on wills, the intestacy rules, estate administration and financial provision for families:

Wills
The Act amends section 18 of the Wills Act 1837 inserting various changes, such that:

1. The entering of a registered civil partnership will revoke a former will of either partner in the same manner as does marriage, unless made in contemplation of forming a civil partnership;

2. A civil partner will be excluded as acting as a witness to their partners will if they will benefit under its terms;

3. On the dissolution or annulment of a civil partnership:

(1) Where a former civil partner has by will been appointed as an executor, trustee or been conferred a power of appointment, that former civil partner will be treated as having died on the date of the dissolution or annulment;

(2) Where any property or interest has been devised or bequeathed to a former civil partner by will, then it shall pass as though the former civil partner had died on the date of dissolution or annulment, but this does not affect a former civil partner’s right to apply for financial provision under the Inheritance (Provision for Family and Dependants) Act 1975.

The intestacy rules
Under the current rules, an unmarried partner has no automatic legal right to share in the estate of a person dying intestate, that is, without having left a valid or comprehensive will. New provision has been made for a surviving civil partner to benefit in the same way as would a surviving spouse under the rules of intestacy. The fixed net sum payable to a surviving spouse will now also apply to a surviving former civil partner

This will not affect the lack of provision for unmarried couples whose only cause of action may be a claim under the Inheritance (Provision for Family and Dependants) Act 1975.

Estate administration
The Administration of Estates Act 1925 will be amended to ensure that references to marrying will include references to forming a civil partnership. References to husband or wife or spouse will include reference to a civil partner; and references without having been married will include ‘or having formed a civil partnership’. Similar amendments will also be made to references to former spouses and surviving spouses.

Inheritance provision
The Inheritance (Provision for Family and Dependants) Act 1975 is amended to allow a surviving civil partner to be entitled to bring a claim against their deceased civil partner’s estate for their own reasonable financial provision where they believe there is inadequate provision under their deceased civil partner’s will or under the intestacy rules.

Afterthoughts
The UK now joins nine other EU countries, and some US states and Australian states, in establishing a register for the legal recognition of civil partnerships. However, this is not the same as “gay marriages” where only Belgium and Holland have legislated.

In certain provinces of Canada the court has opened up the possibility of marriage for same-sex couples. The rights and responsibilities granted by each country of state vary. The Act gives the Inland Revenue the power to introduce regulations effecting changes to existing tax legislation, both primary and secondary. Tax changes will take effect from 5 December 2005, the date the Act comes into force.

With the ever increasing duty of care, professional advisers must now be aware of the full effects of the Act on the estates of clients in a registered civil partnership. This should now be a check undertaken when accepting instructions for creating a will or regarding the administration of an estate where a same-sex relationship is disclosed or suspected.

The Act puts same-sex couples on an equal footing with married couples, but in a better position than that of unmarried heterosexual couples living together as husband and wife. Consequently, while the Act amends current legislation to bring it in line with the rights of married couples, it has thereby brought about important distinctions in case law, and most notably Holland v IRC [2003] WLTR 207. In this case, an unmarried heterosexual couple claimed the spouse exemption under section 18 of the Inheritance Tax Act 1984 stating that they were living together as husband and wife, and had done so for a sufficient period of time as to draw a comparison. This was not upheld by the special commissioners who highlighted the mutual rights and obligations of husbands and wives, which was sufficient to justify different treatment for inheritance tax. The Act is thus distinguishing recent case law in respect of same-sex couples.

It is also worth noting that the Act itself does not change current tax legislation. Instead, it allows secondary legislation to be introduced and professional advisors are advised to be prepared for this amending secondary legislation.

The text of the Act can be found at: www.opsi.gov.uk/acts/acts2004/20040033.htm

John Fawcett is a solicitor.