How To Sort Out Your Taxes If You Are In A Civil Partnership – A London Accountant’s Guide

How To Sort Out Your Taxes If You Are In A Civil Partnership

If you’re in a civil partnership, you need to know how to sort out your taxes if you’re going to claim your partner as a dependent on your tax return.

Civil partnerships were codified into UK law more than a decade ago, with the introduction of the 2004 Civil Partnership Act. For the last couple of years, a thousand such partnerships have been established in England and Wales each year, and ever since June 2018, it is an option available to opposite-sex couples as well.

It’s a question that has dogged couples for decades: “Should we file our taxes jointly or separately?” If you’ve been married for a while, it’s an issue you’ll have grappled with in the past. But if you’re in a civil partnership and are thinking of claiming your partner as a dependent for tax purposes, you may be wondering if you need to file a separate return or if it’s okay to do both—and if so, which way is the best choice. The answer depends on a few different factors.

What’s the difference between a spouse and a civil partner?

Marriage has a lot of cultural baggage – it is usually associated with a specific traditional ceremony, celebrations, etc. In contrast to this, civil partnerships are a new institution that requires none of those rituals to take place – which is why it is preferred by some. As far as the law is concerned, the differences between the two are minuscule. The two institutions’ legal content overlaps almost entirely, with equivalent property rights arrangements, social security, and pension benefits, parental responsibility for a partner’s children, next-of-kin rights in hospitals, etc.

Among other things, civil partnerships have all the tax consequences of a marriage – and there are a lot of very specific legal and financial consequences when marriages or civil partnerships are concerned.

Debt And Civil Partners

Civil partners take on one another’s debts that were entered into during the time of the partnership, just the same as spouses including all taxes owed by each partner. Both partners are liable for those, regardless of whose name said taxes are in and who has been paying them to date.

Income Taxes On Civil Partners

There are many instances where spouses and civil partners are considered to be one entity in the eyes of the law, but taxation is not one of them. Partners incur independent tax on their income, as well as any other gains.

There are some tricky moments when it comes to income that originates from joint-owned assets – in such cases, the law considers both parties to be owners of equal shares of the asset by default. Thus, both partners are presumed to gain equal shares of the income, and tax is on that income is incurred on this basis. This situation can be adjusted – if any asset is beneficially owned in unequal shares, this may be declared officially. Doing so would change the size of the income share that each partner receives, and consequently – the part of the income on which each partner is taxed. This is especially relevant if both partners aren’t taxed at the same rate.

A Special Note On CGT

In the UK, the law allows civil partners to transfer certain types of assets between them without incurring CGT, or capital gains tax. A variety of other assets that may generate an income may be transferred tax-free this way, as well as pensions, interestingly enough. Partners with different tax rates will definitely want to look into that.

Selling a Home

In UK law, home is not just where the heart is but is a specifically defined property shared by both partners. Known as a principal private residence, or PPR, both partners can have only one of those between them, and the PPR needs to be declared to be such by the partners. Once this is done, some very specific rules start applying to the PPR – including a special CGT tax exemption for selling said property.

Inheritance tax

Inheritance tax, or IHT, is another subject of note when it comes to civil partnerships. Notably, IHT doesn’t apply when it comes to the transfer of value between spouses or civil partners. There are some caveats to this unlimited exemption from IHT for transfers of value to spouses and civil partners that do not treat the UK as their permanent home, a.k.a. are not domiciled in the UK. Since the law changed in 2013, such individuals owe IHT when they inherit assets totaling more than £325,000.

In conclusion

Most of the aforementioned consequences stem from the intricacies of UK law and directly affect both partners’ financial states. Hence, civil partners should familiarize themselves with the details of their situation. There are useful materials on the subject to be found online, but relying solely on those is ill-advised, as some of them may be outdated, ill-informed, or poorly written. This is why the best course of action in such a situation is to discuss the situation with an experienced accounting service, such as London accountants Howlader & co.