Tax implications of civil partnerships for farm businesses

For some couples, civil partnerships are an alternative and more modern way of formalising their relationship than marriage.  

This is a matter of personal choice which may be guided by family and or religious considerations. Some perceive marriage as patriarchal and object on this basis.

In reality, there are few legal differences between the two, even when it comes to their application within a farm business which often has complex ownerships and may have been passed down through generations.

See also: How can a will be challenged?

Tax adviser Willem Puddy of rural accountant Old Mill and Emily Finn of solicitor Clarke Willmott give their advice on the considerations for civil partnerships in a farming context.

What is a civil partnership?

This is a legal status acquired by registering as civil partners, providing similar legal rights to married couples.

Same-sex couples have been able to form a civil partnership since 5 December 2005, and opposite-sex couples since 1 January 2020.

“What a civil partnership is not is a marriage, but civil partners are in an identical position to spouses in a marriage in relation to tax, inheritance, state pension, financial provision on relationship breakdown and rights of occupation,” advises Ms Finn, an associate in Clarke Willmott’s divorce and family law team.

How civil partnerships work

The prospective civil partners must give 29 days’ notice at the local register office that they intend to form a civil partnership.

A document must be signed by the couple in the presence of a registrar and two witnesses in order to legally form the civil partnership.

“As is also the case with marriage, the parties must be unmarried, not already a civil partner and aged over 16, with parents’ permission if under 18,” says Ms Finn. Both parties must also consent and have capacity.

Marriage and civil partnership are dealt with under separate legal regimes – the Marriage Act 1949 and Matrimonial Causes Act 1973 for marriage and the Civil Partnership Act 2004 for civil partnerships.

A marriage is solemnised by saying a prescribed form of words, whereas a civil partnership is registered by signing a civil partnership document.

Marriages are registered on paper in a hard copy register, recording also the names of the fathers of the couple. Civil partnerships are recorded on an electronic register, with the names of the fathers and mothers of the couple.

Pre- or post-civil partnership agreements can be used to set out how finances will be regulated during the civil partnership, as well as to agree how finances will be dealt with if the relationship breaks down.

Tax

For tax purposes, civil partners are treated the same as a married couple, but as this can be a complex area, it is sensible to seek professional advice, particularly when assets such as a farm are involved.

“If the partners come to a farming partnership with different amounts of assets, I would recommend they speak to an adviser to get everything in order,” says Mr Puddy.

If one or both partners came to the relationship with a rental property, or income is received from a farm or land being rented out, it is possible to have that income taxed in unequal shares if the partners wish.

This could make for good financial planning if one partner pays tax in a lower bracket.

A deed must be signed in order to achieve this. “Income tax form 17 must be completed and returned to HMRC or tax will be payable in a 50:50 split,” Mr Puddy advises.

Transfers between civil partners are not usually liable to inheritance tax (IHT), so if one partner dies and leaves their entire estate to the other, no tax will be payable.

Each individual has a nil-rate band (NRB) tax allowance of £325,000.

Upon death, if the entire estate is being left to the surviving partner, the whole of that allowance is passed across to the surviving partner, giving them a total nil-rate band IHT allowance of £650,000. 

Any inheritance tax payable is due only on the death of the second partner. Additional relief of £175,000 is also available through the residence nil-rate band when the principal residence property is passed to a civil partner.

However, this relief is only available on one property, so if two homes are owned, an election must be made as to which property is to be the main residence.

To qualify for the private residence exemption, the home in question must be registered jointly between civil partners.

“Loss of this relief can be expensive, so I would advise careful planning – for instance, if each owns a house prior to the civil partnership and the plan is to sell one of the houses, it would be financially sensible to do so before entering into civil partnership,” says Mr Puddy.

Careful preparation 

Civil partners can enter into the equivalent of a pre- or post-nuptial agreement.

Ms Finn recommends that parties who intend to enter a civil partnership should carefully consider putting an agreement in place if they wish to protect pre-acquired wealth, a family business or any inheritance from the division on dissolution of the civil partnership, should the relationship break down.

“Courts will give consideration to such agreements and, provided the terms are fair and various guidelines are satisfied, they are likely to be upheld,” she says.

Tailored legal advice should be sought at an early stage.

Wills

The situation with regard to wills is exactly the same as for marriage. If someone who has made a valid will marries or forms a civil partnership, this automatically voids any will, barring a few exceptions, says Ms Finn.

Even if the present will leaves all property to the other, a new will must be made. Civil partners who have not made wills are treated according to the rules on intestacy, the same as anyone.

Ending a civil partnership

Civil partnerships can be brought to an end in very much the same way as a marriage.

“A civil partnership may only be ended on death, or by a final dissolution or nullity order,” Ms Finn explains.

The key difference is that the process is known as “dissolution”, not divorce, but the steps involved are much the same.

If a civil partnership is being dissolved the arrangements for finances must be dealt with in exactly the same way as for divorcing couples.

A marriage can be annulled if it is not consummated, which is not the case in civil partnerships.

Titles

In the case of the nobility and gentry, a civil partner of someone using a courtesy title may not use their partner’s title. Courtesy titles are used by the heirs of dukes, marquesses, earls and others.