Today is: 30 July 2010
David Anderson solicitor and chartered tax adviser and Graeme Perry solicitor both at Sykes Anderson LLP Solicitors and Chartered Tax Advisers.
Please note that tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.
The Civil Partnership Act came into effect on the 5th December 2005 giving same-sex couples who enter into a civil partnership similar treatment and benefits to a married couple. These benefits extend to various tax advantages including an exemption from inheritance tax for assets passing between two UK domiciled partners. Following the 2008 budget there is also the benefit of being able to transfer any unused nil rate band between the partners.
As part of the governing legislation, provision is made for the applicability of foreign partnerships in the UK. Certain partnerships in other countries are automatically considered as equivalent to a civil partnership in the eyes of the UK authorities. It would seem appropriate that this would be a reciprocal arrangement but it has become clear that UK civil partners may in fact face disadvantages in other countries.
One such country where this is the case is France. The French equivalent of a civil partnership is known as a Pacte Civil de Solidarité (PACS), which is available only to those with a joint residence in France or to French citizens with foreign partners. The PACS is automatically recognised in the UK as equivalent to a civil partnership so long as it is between same sex partners. The recognition of the PACS in the UK is not matched by the treatment of UK civil partners in France. Although in certain circumstances the civil partnership is recognised by the French authorities there are others areas where civil partners are not even considered as connected. The most notable of these circumstances is the disadvantages caused by French inheritance tax rules.
As in the UK, married couples benefit from a total exemption from IHT in France for assets passing between them. This has only been the case in France since August 2007 and the exemption also applies to partners who have a PACS. However, a UK civil partnership is not recognised for these purposes so the partners cannot benefit from the exemption. The consequences of this can be highly punitive due to the rates imposed.
In the UK, inheritance tax is charged on the estate of the deceased at a fixed rate of 40% on all assets above the nil rate band, which is currently £312,000, subject to the spousal/civil partner exemption and other exemptions. However, French inheritance tax is charged on the beneficiary with the rate varying depending on their relationship with the deceased. Civil partners are for this purpose treated as non-relatives and as such must pay inheritance tax at the rate of 60% on all assets, which pass between them over the meagre tax-free allowance of €1,500. French inheritance tax will be charged on any French assets owned by UK domiciled individuals at death. The beneficiaries of individuals who have retired to France and become French domiciled will have to pay French IHT on all assets no matter where they or the assets are located. Partners wishing to pass assets to each other on death therefore face large IHT liabilities.
This situation is on the face of it discriminatory and appears difficult to justify particularly as France does recognise the civil partnership for other purposes. For example those in a civil partnership will be charged to tax on their household income as opposed to being taxed individually. This is essentially akin to the taxation of married couples.
The partnership is also recognised for civil reasons so that it can have an effect when forced heirship becomes an issue. This is the French law whereby assets must pass to certain relatives (primarily children but it also applies to siblings and to parents) on death. Due to the recognition of civil partnerships for this reason, so long as neither partner has children from a previous marriage, a will can be made so that all French property passes to the partner upon death.
The solution would appear simple for civil partners who move to France in that they should also enter into a PACS so that they can benefit from the inheritance tax exemption. However, in order to successfully apply for a PACS, a certificate must be obtained from the British authorities showing that you are single. This will not be provided if the individuals in question are in a civil partnership. This makes it extremely difficult for same-sex partners to gain the same protection as married couples when moving to France. In order to qualify for a PACS the couple would need to dissolve their civil partnership. As well as the administrative burden of such an event it appears an outrageous demand that civil partners go through the equivalent of a divorce and re-marriage so that they may benefit from the same tax advantages in France as their French equivalents.
The UK-France double tax treaty relating to income and capital gains tax prescribes that UK nationals should not face more burdensome taxation in France than French nationals in the same circumstances. There is no similar anti-discrimination article in the double tax treaty governing inheritance tax but the current treatment of UK civil partners appears to conflict with the spirit of double tax treaties in general. Civil partners with assets in France and those considering moving there may seek to protest for a change to this position in France. As of yet there has been no European-wide harmonisation to ensure recognition of civil partnerships throughout the EU. Those concerned about their position under this discriminatory situation may consider lobbying their MEPs to push for a change.