Is a change to Spouse Exemption on the cards?

A recent pensions case heard in the Supreme Court could well have implications for capital gains tax and inheritance tax.

The case involved Denise Brewster whose fiancé sadly died on Boxing Day 2009. They have been together for more than 10 years and had got engaged on Christmas Eve. Less than 48 hours later he died aged 43. They owned a property together and were very much in a long term permanent relationship.

Denise had to start the difficult process of dealing not only with bereavement, but also with the financial aspects of her loss.

Denise’s partner had been employed for 15 years by Northern Ireland’s Translink and had been paying into the local government pension scheme. Most pension schemes include a clause that provides a payment to a partner in the event that the policyholder dies before they begin to draw their pension.

It can be worth up to 50 per cent of the income, depending on the policy and is termed a survivor’s pension. It is automatically applied in the case of a marriage or civil partnership for both public and private pensions, and typically by private pension schemes for unmarried couples.

In the case of unmarried partners in public schemes however, the provision has been reliant on the policyholder filling in a straightforward forward nominating the recipient. In this case, that hadn’t been done and Denise was refused the benefit. That’s despite being able to demonstrate a long-term personal and financial partnership with her deceased fiancé.

Denise’s lawyers argued that the requirement of such a form was disproportionate in its effects, amounting to discrimination. They argued that it breached no less than a 2009 article in the European Convention on Human Rights, protecting a person’s rights to property and the peaceful enjoyment of possessions.

The judges of the Supreme Court unanimously agreed, declaring that the point of the 2009 regulations “must have been to remove the difference in treatment between a longstanding cohabitant and a married or civil partner of a scheme member”

“This is a very welcome ruling,” added former Pensions Minister and Director of Policy at Royal London, Steve Webb.

“It is totally unacceptable for cohabiting couples to be treated as second class citizens. With more than six million people living together as couples and the numbers rising every year, this is an issue that needs to be addressed as a matter of urgency. We need pension scheme rules which reflect the world we live in today, and not the world of fifty years ago”.

But such treatment of unmarried couples doesn’t end there and with the ruling expected to clean up the remnants of outdated policies when it comes to public pensions, the knock-on effects could be dramatic.

In the judgment in this case, the Supreme Court has said that it was the duty of the state to secure Ms Brewster’s right to equal treatment under Article 14 of European Convention of Human Rights rather than setting out a requirement that this right must simply be respected.  It remains to be seen whether this will lead to a challenge on other areas of perceived discrimination against co-habiting couples including inheritance tax and capital gains tax, where the generous spouse exemptions which apply to married couples are denied to co-habiting couples.

There have been challenges in the past which have not been successful, but if the State is to be held to account in ensuring the right to equal treatment then we could well see this argument used in relation to taxation, which could have huge implications for changes to our tax code in order to bring it into line with modern life.

Tax planning for co-habiting couples does bring with it restrictions and complications which makes the need to plan earlier ever more important. Co-habiting couples also have a much higher need to ensure that Wills are up to date and reflect their wishes as they have no automatic rights under intestacy rules.  It is not only pension nominations which need to be kept up to date.  Everything from property ownership, savings and investments and pensions needs to be carefully planned to ensure that if a death occurs the survivor is not left with a financial nightmare to deal with as well as the loss of a loved one.

For further information and help with inheritance tax issues and estate planning advice, please contact the TaxDesk on 0845 4900 509 and ask for Carol Wells.