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Should relatives be allowed to enter civil partnerships to benefit from Inheritance Tax exemption?

View profile for Naomi Message
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In the days of ever increasing property values, but where the amount a person can pass to anyone free from Inheritance Tax on their death has been frozen for almost 10 years, should we be looking to protect the assets of those co-dependent on one another, whether or not they are in an intimate relationship, from Inheritance Tax in the same way we do spouses?

Civil partnership rules

In England and Wales at present the Civil Partnership Act 2004 provides that two people cannot enter into a civil partnership if:

  • they are not of the same sex (although this looks set to be changed so as to include heterosexual relationships following the Supreme Court decision on 27th June 2018 that this requirement is incompatible with the European Convention on Human Rights laws on discrimination and the right to private and family life);
  • either of them is already married or in a civil partnership;
  • either of them is under 16 (or under 18 without parental consent); or
  • they are within prohibited degrees of relationship (which forbids civil partnerships between siblings (including half-siblings), parents and children, etc).

A civil partnership is merely the creation of a legal relationship between two people which, whilst establishing a similar legal position to marriage at present, does not require an intimate relationship.  Marriage, on the other hand, does have such a requirement.   Where a marriage is not consummated it is rendered voidable.  Unlike marriage, however, there is no requirement for an intimate relationship or consummation for those who enter into a civil partnership. 

Where two people, such as siblings, are co-dependent on each other, the law offers their relationship very little protection.  Why shouldn’t they be allowed to solidify that co-dependent relationship by entering into a purely platonic civil partnership enabling them to benefit from the same securities merely because they are relations?  Is this also incompatible with the European Convention on Human Rights laws on discrimination and the right to private and family life?

Should the prohibition on two people entering into a civil partnership if they are within a prohibited degree of relationship be abolished so as to include the alternate that where two people are within a prohibited degree of relationship they can enter into a civil partnership if they are sufficiently co-dependent on one another?

Current Inheritance Tax (IHT) rules in England and Wales

Based on the current IHT rules each individual can pass up to £325,000 of taxable assets to whomever he or she chooses before incurring IHT.   This is known as the “Nil Rate Band”.  On the death of the first spouse (throughout this blog the term "spouse" refers to those who have married or entered into a civil partnership and are domiciled in England or Wales) any assets passed to the surviving spouse will attract 100% Spouse Exemption meaning there will be no IHT to pay on the first death.  No such IHT exemption is available to those who are co-dependent but cannot or have not entered into a marriage or civil partnership.

Any assets passing with the benefit of Spouse Exemption (or any other applicable IHT exemption or relief) will not use up the Nil Rate Band.  On the death of the second spouse a claim can be made to transfer the unused percentage of the Nil Rate Band of the first spouse.  This means that those in a marriage or civil partnership can ultimately pass up to £650,000 of taxable assets on their death to whomever they choose before incurring IHT at 40%.  Unfortunately, however, the unused Nil Rate Band cannot be transferred to anyone other than a surviving spouse’s estate.

The IHT rules were further complicated by the introduction of the Residence Nil Rate Band.   Where death occurred after 6 April 2017 an additional IHT free amount (£125,000 in the 2018/19 tax year) can be claimed provided that the deceased had a qualifying residential property inherited by direct lineal descendants (being children or grandchildren, etc of the deceased) and where the deceased’s estate does not exceed £2.25 million (2018/19 tax year).  Again, any unused percentage of the Residence Nil Rate Band can be transferred to the surviving spouse (provided they also qualify for the Residence Nil Rate Band) meaning those in a marriage or civil partnership can pass up to £900,000 of taxable assets on their death to whomever they choose before incurring IHT at 40%.  Again, the unused Residence Nil Rate Band cannot be transferred to anyone other than a surviving spouse’s estate.

Whilst IHT due in relation to property (being houses, buildings or land) can be paid in 10 equal annual instalments over a period of 10 years, this may still force the surviving occupant to sell their home in order to fund the IHT bill.  Should the same principles of Spouse Exemption apply to anyone, whether related or not, who is co-dependent on the deceased provided they choose to solidify their legal relationship by way of civil partnership?

This begs the question, why shouldn’t two people who build a life together (such as siblings) and live as one co-dependent unit be able to enter into a civil partnership, or other such legal relationship, in order to benefit from the IHT exemptions afforded to spouses? A change to the Civil Partnership Act 2004 allowing those with a “prohibited degree of relationship” to enter into a civil partnership provided they are co-dependent on one another could easily achieve this.  Terms such as “Spouse Exemption” could then be tweaked and modernised to reflect the evolution of the law.

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