REV 28, 16 March 2005
Who is likely to be affected?
1. Same-sex
couples.
General description of the measure
2.
The measure paves the way for changes to all existing tax legislation,
both
primary and secondary, so that civil partners formed as a result of
the Civil
Partnership Act 2004 (CPA) will be treated the same as married couples
for tax
purposes. It gives the Inland Revenue the power to introduce regulations
to effect
those changes.
Operative date
3. The tax changes will take effect
from 5 December 2005 – the
date the CPA
comes into force.
Current law and proposed revisions
4. Married and unmarried
couples are usually treated differently for tax
purposes. For example a husband and wife are protected from tax charges
that
might otherwise arise if they transfer assets between them. This protection
is not
available to unmarried couples. On the other hand, there are situations
where
husband or wives can be taxed on certain benefits that are provided
for their spouse
but if the persons concerned are unmarried that is not the case. There
are, in addition, limited circumstances in which unmarried couples are treated
as if they
were married.
5. The CPA creates an entirely new legal status of
civil partner, giving same-sex
couples in the UK the opportunity of acquiring a legal status for their
relationship.
Couples who enter into a civil partnership will gain a package of rights
and
responsibilities reflecting those already available to a married couple.
6.
For tax purposes, the Government has announced that civil partners
will be treated the same as married couples. Therefore, from the start
of the civil
partnership scheme, tax charges and reliefs and anti-avoidance rules
will apply
equally to married couples and civil partners, and those treated
as such.
7. Full details will be published with the regulations.
The key areas affected
include:
Inheritance Tax (IHT)
8. Transfers between married
couples in lifetime or on death are generally
exempt from IHT without limit. On a par with married couples, civil
partners will be
able to make gifts or bequests to their partners with the benefit of
IHT exemption.
9. There will be consequential changes elsewhere in
the IHT code to extend to
civil partners other provisions currently applying to spouses. For
example, IHT antiavoidance
provisions that apply to marriage will be applied to civil partnerships.
Capital Gains Tax (CGT)
10. CGT will apply in relation to civil partners
as it applies in relation to married
couples. In particular:
- Private Residence Relief. Only one property
owned by a couple, whether that property is owned solely or jointly,
may be treated as the principal private residence of either of
them at any time for CGT purposes and thus qualify for private residence
relief;
- transfers of assets between persons who are civil partners
who
are living together will be on a no-gain no-loss basis, and thus
not
attract an immediate CGT charge;
- and civil partners will be “connected
persons” in the same
way as husbands
and wives. They will also be connected with certain other persons, such as
close relatives of their civil partner, in the same way as husbands
and wives.
Furthermore, where one partner settles property into a settlement
under which the other partner can benefit, the settlor may be liable
to CGT
by reference
to capital gains realised by the trustees if the relevant conditions as to
the residence of the settlor, and certain other conditions, are
met.
ISAs
11. There are two minor areas where the ISA rules
will be amended to cover a
civil partner: firstly the eligibility of a spouse of a Crown
employee serving overseas
to subscribe to an ISA; and secondly the ability of a husband
or wife to subscribe to
an ISA account on behalf of their spouse who lacks the mental
capacity to operate
their own ISA account.
Bank and building society interest paid to individuals
12. 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. The category
of people who can sign a
gross 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 to include civil partners.
Pension Schemes (other than state)
13. 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. Changes will also be made to the pension tax
simplification
legislation that takes effect from 6 April 2006 to account for the
terms of the CPA.
Settlements
14. Anti-avoidance legislation will be
extended to include civil partners in the
same way as spouses. The anti-avoidance Settlements legislation prevents
people
avoiding tax by transferring their income to other people who pay less
tax. There
are special rules for husbands and wives and these will be extended
to civil partners.
Beneficial Ownership - Sections 282A and 282B ICTA
1988
15. Married couples frequently own property jointly
and the Inland Revenue treats
them 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 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.
Company Control
Tests
16. Section 416 of the Income and Corporation
Taxes Act provides various tests
for identifying who controls a company. It also deems a company to
be under the
control of a person if it is controlled by an associate of that person.
The term“
associate” is defined in section 417 and includes husband or
wife. The definition of"
associate" will also include civil partner.
Stamp Duty and Stamp
Duty Land Tax (SDLT)
17. There is currently an exemption from stamp
duty and SDLT for transactions
carried out in connection with divorce such as a transfer of shares
or the transfer of
the marital home from joint ownership into the sole ownership of
one of the exspouses.
There will be a similar exemption for transactions carried out
in connection
with the dissolution of a civil partnership.
Transfer of assets abroad
18. Civil partners will be
treated in the same way as married persons under the
transfer of assets abroad legislation in sections 739-746 ICTA
1988. This legislation
aims to prevent individuals avoiding income tax by means of
the transfer of assets.
It applies where, as a result of a transfer
and/or any associated operations, income
becomes payable to persons resident or domiciled outside the UK.
19.
The legislation provides that an income tax charge may arise on the
husband
or wife of an individual who makes a transfer of assets, where the
spouse is involved
in the transfer or associated operations. This will in future apply
equally to civil
partners.
20. In addition, we will extend to civil partners
the practice of not normally seeking
to tax under section 739 UK domiciled individuals in relation to income
of their nondomiciled
husband or wife, where that spouse would be outside the section 739
charge because of his or her entitlement to the remittance basis.
Married
couple’s allowance
21. 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
22. The Blind Person’s
Allowance (BPA) contains a provision that any unused
allowance (because the person does not have sufficient income) can
be transferred
to their spouse. Surplus BPA will also be transferable to a civil partner.
Further
advice
23. If you have any questions about these proposals,
please contact Mark Taylor
on 020 7147 2386 or Sara Woollard 020 7147 2380. Information about
Budget
measures is available on the Inland Revenue website at www.inlandrevenue.gov.uk
