Tom, aged 31, and Jessica, 29, have been together for eight years. They are committed to each other but neither think traditional marriage is for them. They cohabit in a flat Tom bought in his name. As well as the property, Tom has £500,000 in cash passed down to him by his grandparents, currently held on deposit (a bank deposit you cannot yet access).
Recently his dad passed away suddenly, leaving him with a further £200,000. The doctors think Tom’s dad’s condition was genetic and Jessica is now wondering whether she would be looked after in the event Tom also dies. Jessica is a nurse with almost no savings and is pregnant with their first child, while Tom earns £190,000 a year as a senior associate at a law firm. As opposite-sex couples will soon be able to enter into a civil partnership, they wonder whether this could be a good option.
There are multiple reasons why a civil partnership could leave the couple financially better off. In the event of Tom dying, it could also help ensure Jessica has the maximum amount possible to support her and the new baby.
Without even taking into account the money tied up in Tom’s flat, if he were to die when the pair were not in a civil partnership and wanted to pass his £700,000 estate on to Jessica, it would be above his nil-rate band (currently £325,000). Inheritance tax (IHT) of 40% would be payable on the £375,000 not covered by Tom’s nil-rate band.
This means a minimum of £150,000 in tax and likely more when the property is taken into account. If Tom and Jessica enter into a civil partnership, assets can be passed between the couple free of IHT.
Where there’s a will
Writing a will is essential. If they decide against entering into a civil partnership, and if Tom has not written a will and Jessica has their child before he dies, then all his assets would pass to the newborn child and not Jessica. Similarly, the flat they live in is in Tom’s name and would be part of his free estate (assets an individual can control and dispose of by their will), meaning it would also not go to Jessica unless they were in a civil partnership.
Tom has a significant amount of wealth he may choose to invest. If a couple is in a civil partnership, investments and even rental property can be switched between the pair, reducing the capital gains tax (CGT) liability when they are sold. Currently, Tom could make a gain of £11,700 before CGT is due.
However, if the couple were in a civil partnership and they would both have their individual CGT allowances, jointly-owned assets could make a gain of £23,400 without paying any CGT.
Like everyone, Tom and Jessica have a personal allowance that is not subject to income tax, a personal savings allowance, and a dividend allowance.
Jessica pays tax at a much lower rate than Tom. Therefore, if saving tax is the only driver, the couple could put any cash or assets that produce a regular income in Jessica’s name, taking advantage of her personal allowance, personal savings allowance, and lower tax rate.
Similarly, if they wanted to invest in dividend-paying stocks, they could share the dividends. This would take advantage of both their dividend allowances, with anything above their allowances going in Jessica’s name to make use of her lower-rate taxpayer status.
Rachael Griffin is a tax and financial planning expert at Old Mutual Wealth