Taxation of Civil Partnerships
The recently published Finance (No. 3) Bill (“the Bill”) 2011 provides for changes to existing tax legislation for same sex couples following the enacting of the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 (“the Act”) from January 2011. The purpose of the legislation is to treat registered civil partners the same as spouses and therefore apply the same tax treatment for civil partners as currently exist for married couples. The legislation is expected to be passed and take effect in July 2011 with any changes applying for the 2011 tax year of assessment.
It had been anticipated that the Bill would extend to cohabitants as well as registered civil partners but it is interesting to note that the rights of cohabitants have not been significantly increased in that the same tax advantages offered to married couples and registered civil partners will not be available to them apart from in very limited circumstances. This article primarily covers the tax effects of the Act for civil partnerships but will briefly look at the tax implications for co-habitants.
A civil partnership is defined as a relationship similar to a marriage between two people of the same sex who enter into a legal agreement governed by the Act. The parties to the partnership must be over 18 years of age. A civil partnership will not be valid in law unless three months notice has been given to the Registrar. The civil partnership is required to be registered with the relevant Registrar (in accordance with the HSE) in order to qualify for favourable tax treatment. Following the registration of a civil partnership, civil partners must notify their local Revenue office of the date of registration of the civil partnership. It is not possible for opposite sex partners to opt to register as civil partners rather than marry.
Taxation of civil partners
The tax changes affecting civil partners fall across all the main tax heads; namely income tax, capital gains tax, capital acquisitions tax, VAT and stamp duty. The taxation of civil partners will be broadly similar to that of married couples.
In the year of registration of the civil partnership, both partners will continue to be taxed on a single assessment basis. In subsequent years, the civil partners can elect for joint assessment, separate assessment or separate treatment as appropriate. In the absence of a specific election, joint assessment will apply to the civil partnership automatically. Provisions similar to the year of marriage relief as for a married couple may be available for civil partners.
If joint assessment is elected for, one civil partner becomes the nominated civil partner and that civil partner is assessable on both incomes (including capital) under the joint assessment basis. In the absence of such a nomination, Revenue will deem the civil partner with the highest income as the nominated civil partner.
Income tax implications
Under the new sections 1031A TCA 1997 to section 1031K TCA 1997 which are proposed to be inserted into the Taxes Consolidation Act 1997, civil partners are entitled to avail of the same tax credits, reliefs and rates as married couples. As is normal under joint assessment, civil partners will be able to decide how they wish to have their tax credits and standard rate band allocated between them. The extended rate band will be available to civil partners who are living together and the level of the increase will depend on whether the couple have one or two incomes.
While there is a broad range of credits that are available to civil partners, some of the more common credits and reliefs available are as follows:
- tax relief may be claimed in respect of the cost of qualifying health expenses paid by either civil partner for the other;
- the age tax credit is available if one or both of the civil partners is aged 65 years or over and are jointly assessed;
- if one of the civil partners is in receipt of a one parent credit, following the registration of the civil partnership, the entitlement will continue for that year only;
- the dependant relative tax credit can now be claimed by a person caring for a relative of his or her civil partner; and
- if one or both of the civil partners are aged 65 or over, and the joint total income is below the relevant exemption limits, interest may be paid without the deduction of DIRT, once the relevant application to the financial institution is made.
Capital Gains Tax
Section 1031L TCA 1997 as proposed deals with the capital gains tax implications for civil partners. The tax treatment is similar to that of married couples in that assets can be transferred between civil partners without triggering a capital gains tax charge. Furthermore, where assets are transferred, the person acquiring the asset is deemed to have purchased the relevant asset at the same date and for the same price as the person transferring the asset. Like married couples, in order for relief from capital gains tax to apply, the civil partners are required to be living together and both must be taxable in Ireland for capital gains tax in the year of assessment that the transfer is made. With regard to Principle Private Residence relief, where a property is transferred from one civil partner to the other, the occupation and ownership of the property also transfers.
On dissolution of the civil partnership, assets may be transferred from one partner to another free from capital gains tax where the transfer is part of a formal dissolution (assuming both parties are chargeable to capital gains tax in Ireland).
Where a civil partner disposes of an asset to a third party and a chargeable gain arises, the capital gains tax arising will be assessed on the nominated civil partner in that year of assessment. Capital losses available to one civil partner can also be used by the other partner where the partners are jointly assessed.
Capital Acquisitions Tax
Gifts and inheritances between civil partners are exempt from capital acquisitions tax. For example, where one of the partners dies, the surviving civil partner will be exempt from capital acquisitions tax on any inheritance they receive from their deceased partner. Similarly, any gifts that pass between the civil partners during their lifetime will also be exempt from capital acquisitions tax.
Where the partners in a civil partnership have children (whether that be a child of the partnership or a child of one of the civil partners), such children will be entitled to the Group A tax free threshold in respect of gifts or inheritances taken from wither or both civil partners. The current tax free threshold is €332,084. Such children may be born before the registration of the civil partnership or during the civil partnership.
Surviving spouse relief has been extended to surviving civil partners, who take their deceased civil partner's threshold if that civil partner was a nearer relative of the disponer. Favourite nephew relief will also be extended so that it is available to the child of the civil partner's brother or sister.
Transfers of assets between civil partners will not attract stamp duty. Relief will not available if any party other than the civil partners is a party to the deed. Furthermore, the stamp duty relief for transfers between spouses following the dissolution of a marriage is to be extended to transfers between civil partners following the dissolution of the civil partnership.
Where however, civil partners transfer assets to a person other than their civil partner, stamp duty may apply for the person receiving the asset. Taking the example of a transfer from a civil partner to their child, stamp duty is likely to arise for the child on such a transfer.
Consanguinity relief is to be extended to included transfers (excluding residential transfers) made to an individual's civil partner, the civil partner of a parent, or the civil partner of a lineal descendant (i.e. a child).There does not appear therefore to be a provision for a son or daughter in law.
In the area of VAT there are few relevant areas of change. One important area is the issue of leases between connected parties. A landlord's option to tax on the grant of a lease is restricted where the lease is to a connected party. The definition of connected party has been extended to provide that a person is connected to their civil partner.
Dissolution of a partnership
The courts are able to grant a decree of nullity of civil partnership in broadly the same way as decrees of nullity of marriage are granted. The courts are also able to dissolve civil partnerships in a similar way to the granting of divorce. Where a civil partnership is legally dissolved, Revenue will record the dissolution and each party will be treated as individuals for tax purposes from the date of the dissolution.
The tax position is broadly similar to that of a married couple who have undergone a separation or a divorce. Where joint assessment was elected for, the nominated partner will be assessed on both partners' income from 1 January right up until the date of dissolution. Full tax credits and standard rate bands will be available as normal. After the date of dissolution, the civil partners will be assessed on their own income as single individuals. Where separate assessment applied prior to the dissolution, the situation will be the same as described above.
Where maintenance payments (excluding those paid for the benefit of children) are paid from one party to another under a legally enforced maintenance agreement, the payor of the maintenance payments will be entitled to a deduction against their income tax liability. The person in receipt of such payments will be assessed to income tax or PAYE as appropriate. Assets should transfer between civil partners free from capital gains tax under a Court ordered dissolution.
Tax implications for co-habitants
As mentioned, the Bill does not give opposite-sex cohabiting couples or same-sex cohabiting couples the same tax treatment as civil partners or married couples. They will effectively be treated as strangers under tax legislation. The Bill instead focuses on providing tax relief for a redress scheme which allows a Court to order maintenance in the case of long term cohabitants which essentially provides for financial comfort for such individuals. It is proposed that section 1031Q TCA 1997 will state that where a Court orders maintenance, the person paying such maintenance can deduct the payment for income tax purposes and the person in receipt of such a payment is subject to income tax.
No capital gains tax, stamp duty or capital acquisitions tax relief was introduced; however the Bill does provide for relief from capital gains tax and stamp duty where a property is transferred from one co-habitant to another by Court order. With regards to gifts and inheritances, the Group threshold for co-habitants remains at Group C and dwelling house exemption may be available where a qualifying house is transferred from one individual to another.
The Bill provides that the legislation will come into effect for the 2011 tax year of assessment and that it applies to instruments executed on or after 1 January 2011 and also gifts or inheritances taken on or after 1 January 2011.
Crona Brady is an Assistant Tax Manager at Grant Thornton, Dublin.