The impact of the civil partnership announcement for financial planning

You’ve probably spotted the campaign to allow mixed-sex couples to enter a civil partnership in the news. With Theresa May announcing that civil partnerships will be open to all couples, mixed-sex couples are poised to get more choice.

But it could mean that relationship breakups down the line are going to become a lot more complicated in terms of finances and legal support.

The call for change stems from the Civil Partnership Act 2004, which allowed same-sex couples, who at the time couldn’t marry, to enter a civil partnership. This afforded them the same legal and financial protection as marriage. Then, in 2013, same-sex marriage was legalised in England and Wales, with Scotland following suit just a year later. As a result, same-sex couples can choose between a civil partnership or marriage.

Since then, the debate to let mixed-sex couples have the same choice has been growing. Following a Supreme Court ruling, all couples are set to be able to choose. Legislation has yet to be agreed but with Theresa May backing the move, it’s only a matter of time.

What it means for couples

For mixed-sex couples that have not contemplated marriage, a civil partnership can be an attractive way to formalise their relationship and increase the legal and financial protection they have.

In 2017, there were 12.9 million married or civil partner couple families in the UK, making it the most common type of family, according to the Office of National Statistics. However, the second largest type of family and the one that’s growing the fastest is the cohabiting couple family, with 3.3 million in the UK.

There are many reasons mixed-sex couple choose not to get married, and for some, a civil partnership will be an alternative they want to take advantage of.

Cohabiting couples have no rights if the relationship breaks down. But it’s a fact that’s often not understood by those living with their partners.

Two-thirds of people in cohabiting relationships are unaware that there is no such thing as ‘common-law marriage’ in this country, past research found. The study also revealed that 79% of the public agree that there is a need for greater legal protection for unmarried couples upon separation.

Civil partnership could provide a solution for some cohabiting couples.

But alongside the opportunity for greater protection is a more complicated process should the relationship end. For those in a civil partnership that has lasted for at least one year, a dissolution order can be granted.

If more couples are choosing a civil partnership, it’s inevitable that more clients will be coming to you for support when they want to dissolve a civil partnership; including the financial obligations they have to their partner.

The financial benefits of civil partnerships

As we’ve already mentioned, cohabiting couples don’t receive the same financial and legal protections as a married couple when a relationship breaks down. They also don’t have access to the same financial benefits while in a relationship. But those in civil partnerships do:

Marriage allowance: The marriage allowance allows those in civil partnerships to transfer a portion of their personal allowance if it’s unused. If the maximum is used, it can save couples up to £238 in tax annually.

Transferal of assets: Those that are in a civil partnership are free to transfer assets free of tax. With the right strategy in place, it means couples can minimise their liability of Capital Gains Tax (CGT). As a result, couples can shelter up to £23,400 by using their combined CGT allowance.

Inheritance Tax (IHT): Any IHT allowance can also be transferred when in a civil partnership, making it easier to pass on wealth to loved ones. The nil-rate band for IHT is currently £325,000. If someone is leaving their main residence to children or grandchildren, this can be increased even further due to the residence nil-rate band.

ISA inheritance: Couples in civil partnerships can inherit each other’s ISA accounts, along with retaining the tax benefits, should the other die, thanks to the additional permitted subscription.

Spouse pensions: Many members of Defined Benefit pension schemes have additional perks. One that features in many schemes is a pension that’s paid to a spouse should a member die first. This is usually a portion of the pension the member was due to receive.

Legacy: Should a cohabitating partner die without a will, intestate law will be used to distribute assets. It means the surviving partner will be excluded from inheriting. Civil partnership, on the other hand, means the partner is likely first in line. It gives couples more protection but we, and I’m sure you’ll agree, will still be strongly advising our clients make a will.

These factors, and more besides, makes it critically important for clients to seek financial planning services when they enter a civil partnership.

It’s even more important should a civil partnership be dissolved. Much like a divorce, the assets that couples hold will need to be distributed: from savings accounts through to the more complicated pensions, investments and property. Depending on the personal circumstances of your client, you may even need to discuss ongoing financial support for their civil partner and/or children.

The process of dissolving a civil partnership can be emotional, messy and fraught with challenges. But we believe having the right financial plan in place can help make it that bit clearer for your clients.