Taxing dilemmas unfair to the same-sex couple

When one partner dies, a different set of troubles begin, says Christine Stopp. Legislation is urgently needed to clarify the situation and entitle them to rights equal to those enjoyed by heterosexual married couples

The Government's recent announcement of proposed "civil partnerships" for same-sex couples could improve financial security for many in committed partnerships by extending their property and inheritance rights and giving them recognition as next of kin.

Neil Renton, 34, is a financial adviser. He and his partner, John Hogg, 37, an IT manager, have been a couple for more than eight years, and jointly own a house in Edinburgh. Mr Renton's concern is that to have real clout, the proposed civil partnership "will have to have the same weight as a marriage. To split it up there would have to be a divorce, and so on". He also feels civil partnerships should be extended to common-law couples of opposite sex, who have many similar financial concerns.

Property ownership is a big preoccupation. Mr Renton and Mr Hogg say they are in a crazy situation. "We are allowed to buy in joint names, pay our stamp duty and so on, but if one of us dies, the survivor still has to pay inheritance tax," they say. As a financial adviser, Mr Renton is well aware of the implications of this. "If the surviving partner has no means to pay the tax, he or she could be forced to sell the house," Mr Renton says.

The impact could be particularly severe if there are children living with the couple. It is now much more common for same-sex partners to own a property, and booming prices have made the situation worse. "This could be a time-bomb," Mr Renton says. R J Temple's marketing director, Ian Millward, says: "There is discrimination against same-sex couples, and life is a lot more complicated for them. Unlike common law opposite-sex partnerships, they have no right to marry. Same-sex partnerships are more likely to break up, because there are more things which can go wrong, and in addition, the partners may be sensitive about disclosing their status in a formal situation or to get advice."

As things stand, when a same-sex partnership breaks up there are no formal rights. One adviser cites an example of a couple where one woman, who had contributed towards the deposit and mortgage payments on the couple's home, had to sue her former partner, because the house was in the former partner's sole name. It says something for the progress in how same-sex partnerships are viewed that she did win rights in the value of the house.

To be effective, the proposed civil partnerships will need to make changes in the laws on tax and pensions. Tax reliefs for couples are all defined in relation to a spouse, Scottish Equitable's technical manager, Margaret Jago, says. For example, assets can be transferred between spouses free of capital gains tax (CGT) and one partner can leave unlimited assets to a spouse free of inheritance tax on death.

"The only CGT advantage for non-married partners is that if each owns a property, each will be able to claim a main residence CGT exemption when it is sold," Ms Jago says. Otherwise, the lack of spouse exemptions means it is not easy to transfer ownership of assets and the need to pay inheritance tax on the death of one partner could mean financial hardship for the other.

Where corporate pensions are concerned, the picture is moving more in favour of same-sex partners, but there is still a long way to go. Figures from the National Association of Pension Funds (NAPF) show 57 per cent of public schemes and 36 per cent of private schemes treat same-sex couples the same way as opposite-sex partners. The rest allow treatment of same-sex partners to be dealt with at the discretion of the trustees, though, anecdotally, the NAPF says many trustees are inclined to grant benefits to same-sex partners.

There is even a possibility that a law change could make things worse. If pensions schemes are legally obliged to pay equal benefits to spouses and to registered civil partnerships, they could, spurred on by the continuing cost pressures affecting pension schemes, choose to exclude all those outside these categories, which would include unmarried opposite-sex partners.

Same-sex partners have less financial flexibility than married couples, and financial planning, sooner rather than later, is particularly important for them. The main areas to consider are:

* Making a will. Without one, the surviving partner could lose rights to partnership assets;

* Taking out life cover to help replace lost income when one partner dies;

* Finding out about mutual pension benefits. The rules of corporate schemes vary widely. Couples should find out how benefits are treated for the survivor if the pension scheme member dies either before or after retirement age;

* Considering how the joint home should be owned. "Joint tenancy" means ownership automatically passes to the survivor. "Tenants in common" could mean the survivor has to buy out half the house from the deceased partner's heirs, though a properly written will would remove problems;

* Considering ownership of assets. If one partner earns less than the other, assets should be distributed to take advantage of the lower tax rate. Transfers could incur CGT, so this should be looked at when assets are acquired, and

* CGT and inheritance tax are problem areas where complex planning might be needed.

Other problems may exist in unexpected places for the same-sex couple. For example, even house contents policies may refer to "use by the policyholder's spouse". Norwich Union says its policy includes the phrase "or domestic partner", and they are happy to offer a husband-and-wife discount to a long-term same-sex partnership.

More seriously, it seems unreasonable that one class of people in a committed long-term relationship should have fewer rights, less financial freedom, and greater uncertainty than others. As well as proposed pensions changes from the recent green paper, a European directive which recognises same-sex partnerships will be enacted in December this year, so change is inevitable.