Planning for you and your family
Civil partnerships offer significant tax advantages from an estate planning perspective. Until recently, these were off limits to mixed-sex couples in committed relationships, who felt that the institution of marriage was not right for them. Now, thanks to the extension of civil partnerships to mixed-sex couples, these couples have an alternative means of enjoying these advantages.
Whether you are currently in a civil partnership or are contemplating one in the future, it is important to understand how that status may impact your estate planning. Here are a few frequently asked questions that may shed some light on civil partnerships and what they mean for your Will.
Does entering a civil partnership affect my existing Will?
In most cases, your pre-existing Will is automatically revoked (cancelled) when you enter into a legally binding marriage or civil partnership. For this reason, we recommend that newly married couples or civil partners make new Wills as soon as possible.
However, there is an exception to the rule above. This is where the Will expressly states that the person making the Will is making it with the anticipation of marrying or entering into a civil partnership with a particular individual.
If I die without leaving a Will, will my entire estate pass to my civil partner?
When somebody dies without leaving a valid Will in England and Wales, their estate is distributed in accordance with the law known as ‘the rules of intestacy’. Many people assume that when they die their entire estate will pass to their surviving spouse or civil partner. However, if you have children and/or the value of your estate exceeds £270,000, the position will often be different.
Will the dissolution of my civil partnership affect my existing Will?
Your Will does not automatically become invalid in these circumstances. However, once the Court has ordered decree of dissolution (or decree absolute), any provisions in your will which benefit your ex-partner (or appoint them as the executor/trustee of your estate) are automatically revoked. Your estate would then pass in accordance with the other terms of your Will. If there were no other beneficiaries named in your Will, the rules of intestacy will apply. We recommend that our clients make new Wills which better reflect their wishes after a dissolution or divorce.
What does a civil partnership mean for my Will and my estate?
There are significant incentives to formalising your relationship when it comes to tax.
All individuals domiciled in England and Wales, regardless of their marital status, benefit from a tax-free allowance of up to £325,000 known as the ‘Nil-Rate Band’ (NRB). For unmarried couples, anything left in the estate over this amount will normally attract inheritance tax (IHT) at 40%, subject to certain exemptions and reliefs.
Crucially, civil partners and spouses domiciled in the UK can pass on the entirety of their estate to each other free of IHT. This is known as the ‘spouse exemption’.
They can make also make gifts to each other during their life time without reducing their NRB or attracting capital gains tax (CGT). Lifetimes transfers between unmarried couples, by contrast, reduce the transferor’s NRB if they do not survive the transfer by seven years.
As an added bonus, civil partners and spouses are able to pass on their any unused tax free allowance (i.e. NRB) to the estate of the survivor of the two, creating a potential tax-free allowance of £650,000 on the second death. In limited circumstances, the Residence Nil-Rate Band (RNRB) will apply to offer further relief. It too can be transferred to the survivor.
Where only one spouse or civil partner is domiciled in England and Wales, the spouse exemption is limited to £325,000; in such cases the survivor can benefit from a combined tax-free allowance of up to £650,000 provided certain conditions are met. Alternatively, the non-domiciled individual can elect to be domiciled here, although this must be carefully considered. We have extensive experience of advising non-domiciled individuals in this situation.
Equality and choice
Overall, the extension of civil partnership to mixed sex couples is a win for equality and choice. From an estate planning perspective, more couples will benefit from a tax regime that undeniably rewards those who have formalised their relationship by way of marriage or civil partnership.
By Rebecca Fisher and Kieran Bowe, private client partners at Russell-Cooke
