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Inheritance tax rules if we don't register as civil partners?

Tax | Inheritance Tax Helpful? 33

Asked by brinjal, submitted 08 December 2009.

Open Quote Are same-sex couples recognised by inheritance and capital gains tax rules if they choose not to register as civil partners? End Quote

Answered by Justin on 10 December 2009

Simple answer, no.

All couples, whether same-sex or not, are treated as individuals for the purposes of inheritance and capital gains tax unless they are married or registered civil partners.

The main issue regarding capital gains tax (CGT) is not being able to transfer assets between each other without potentially triggering a tax liability. For example, suppose you own £30,000 worth of shares, originally purchased for £15,000. Transferring these to your other half would be treated as a disposal for CGT purposes, so you'd face tax on a £15,000 gain (although using your annual CGT allowance would reduce your tax bill).

The Inheritance Tax (IHT) downside is not being able to pass all of your assets to your partner when you die without the possibility of an IHT bill. Any assets (called your 'estate') over the IHT nil rate band, currently £325,000, will be taxed at 40%. Married couples and civil partners can pass assets to each other on death free of IHT. This also means the surviving partner can't use any of the deceased partner's unused nil rate band.

For example, Mr A and Mr B jointly own a home worth £600,000 and have other assets of around £100,000 each. Mr A dies, leaving his half share in the house and assets to Mr B, a total estate of £400,000. This creates an IHT bill of £30,000 (400,000 - 325,000 x 40%). When Mr B dies his estate is worth £770,000 (assuming no growth). His estate will then have to pay £178,000 IHT (770,000 - 325,000 x 40%).

Were they civil partners then there would be no IHT when Mr A dies and Mr B could use Mr A's unused nil rate band on his death, cutting the IHT bill at that time to £60,000 (800,000 - 325,000 - 325,000 x 40%), a total tax saving of £148,000.

Being civil partners (or married) can also be an advantage regarding pensions. The surviving spouse will be eligible for any benefits payable on the other's death.

If you haven't already done so please make a Will. Failing to do so could mean your assets do not automatically go to your partner on your death. See our Inheritance Tax page for more details.

On the plus side, if each of you own a home you may be able to avoid capital gains tax on the sale of both if you can both prove you used your respective homes as your main residence.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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