Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
What does the civil partnership ruling mean for personal finances?
The Government has proposed to let mixed-sex couples have a civil partnership as an alternative to getting married.
At the moment heterosexual couples can only get married, while same-sex couples have the option of either marriage or civil partnership.
A number of mixed-sex couples had campaigned for the right to enter into a civil partnership – feeling that they didn’t want to enter into marriage for historical, religious and gendered reasons.
So what does the potential rule change have to do with finances?
Essentially it means those people who didn’t want to get married will soon be able to access many financial benefits. Couples who live together but remain unmarried are not recognised by law, which has a big impact on many areas of their finances.
For those who are living together and are unmarried, this article provides a list of benefits of either getting married or entering into a civil partnership.
This allowance lets married couples or those in a civil partnership pass unused tax-free personal allowance between each other – under certain circumstances. It means a spouse or civil partner who doesn’t pay income tax can transfer up to £1,190 of their personal tax-free allowance to their partner – netting a £238 tax saving in a year.
One half of the couple must earn less than £11,850 a year, while their partner must be a basic-rate taxpayer. What’s more, if you haven’t claimed this allowance for previous years you can backdate your claim to 5 April 2015 for any years you were eligible.
This is the big difference for those entering a civil partnership, who hadn’t wanted to marry. Unmarried couples cannot share inheritance tax benefits, while those who are married and in civil partnerships can.
Married couples or those in civil partnerships can leave all of their assets to each other when they die, and it will be free of inheritance tax (IHT). What’s more, they can pass their inheritance tax free band of £325,000 to each other. This means that when the second half of the couple dies they can leave an estate of up to £650,000 free of inheritance tax.
If you are unmarried, any transfers to your other half will count towards your IHT-free limit, and anything in excess of that amount will be subject to inheritance tax.
TRANSFERRING SAVINGS OR CAPITAL GAINS
Married couples or those in civil partnerships can transfer money between themselves much more easily than cohabiting couples. This means they can move assets to the person in the couple who has not used their tax-free allowance or who pays the lowest tax rate, potentially saving them money if they realise a capital gain.
Everyone has a capital gains tax free allowance – currently £11,700 – but once this is used up the tax is payable at 10% for basic-rate taxpayers, or 20% for higher or additional rate taxpayers (for assets other than residential property). By shifting the asset, and so the gain, to the partner who either hasn’t used their tax-free allowance or who is paying lower income tax, the couple can save tax.
DEATH AND DIVORCE
If someone who is living with their partner but is unmarried/not in a civil partnership dies without a will, there is no provision made for their partner. This means that without a will being drawn up, the surviving half of the couple can end up without any of their partner’s assets.
In the worst case this can mean they have to leave a shared property. This is also true in the instance of divorce, as these couples would not be guaranteed to have rights to each other’s property – meaning a lengthy court battle could ensue.
Unmarried couples are not eligible for death benefits in many pensions, which restrict payments to spouses or civil partners, meaning they miss out on survivor’s benefits. If a couple enters into a civil partnership they will be able to benefit from most, if not all, of any widower’s pension their partner’s pension offers.
Laura Suter, personal finance analyst, AJ Bell