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Agony uncle RICHARD CURTIS wonders if men and women and same-sex couples can ever have a meaningful fiscal relationship without tax rearing its ugly head.
THE TAXPAYER IN the recent case of PM v UK ([2005] All ER (D) 255 (Jul)), is described as having 'lived in a stable relationship with Miss D' between 1987 and 1997. They were not married and in June 1991,
Agony uncle RICHARD CURTIS wonders if men and women and same-sex couples can ever have a meaningful fiscal relationship without tax rearing its ugly head.
THE TAXPAYER IN the recent case of PM v UK ([2005] All ER (D) 255 (Jul)), is described as having 'lived in a stable relationship with Miss D' between 1987 and 1997. They were not married and in June 1991,
Miss D gave birth to a daughter and PM was registered as the father on the birth certificate. The relationship ended in October 1997 when PM and Miss D separated and, under the deed of separation, PM agreed to pay weekly maintenance for his daughter of £25. This rose to £35 from April 2002.
For 1997-98, TA 1988, s 347B gave tax relief when qualifying maintenance payments were made by one party to a marriage to the other for the maintenance of any child of the family. PM made a claim to this relief on his tax return for the year ended 5 April 1988. When he made a similar claim on his tax return for the year ended 5 April 1989 — which would have reduced his tax liability by £195 — this was refused by the Inland Revenue, with the explanation that this was 'because you were never married to your daughter's mother'.
PM's appeal to the General Commissioners was rejected, primarily on the grounds that the Human Rights Act 1998, under which he was claiming relief, did not apply as it only came into force on 2 October 2000, i.e. after the tax year in question. PM appealed to the European Court of Human Rights on the basis that there had been a violation of his rights under Article 1 of Protocol 1 of the European Convention on Human Rights and Article 14 of the Convention.
Article 14 of the Convention states:
'The enjoyment of the rights and freedoms set forth in [the] Convention shall be secured without discrimination on any ground such as sex, race, colour, language, religion, political or other opinion, national or social origin, association with a national minority, property, birth or other status.'
The case of R (oao Hooper) v Secretary of State for Work and Pensions [2002] AER (D) 193 had confirmed that marriage fell within 'other status'. Article 1 of Protocol 1 of the Convention states that:
'Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
'The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.'
PM claimed that he was in the same position and had the same legal obligations regarding maintenance as a married father. Whilst he accepted that the existence of a marriage or not might mean that there were different legal obligations regarding the maintenance of a spouse, this was not justification for a different treatment regarding the maintenance of a child. This would be inconsistent.
The UK Government accepted that the qualifying maintenance payment allowance was within Article 1 of Protocol 1; however, the taxpayer was not in the same situation as a married person as he had exercised his free choice not to marry. It contended that the correct comparison was with payments made by one unmarried person to another where relief would similarly not be given. Alternatively, the Government argued that there was an objective and reasonable justification for the difference in treatment. There had been an historical development of the tax relief to maintain the status quo for married couples after the breakdown of a marriage. The tax relief also, it argued, promoted the institution of marriage. 'Legal obligations adhered to marriage and its breakdown that did not apply in non-legally binding partnerships'. The law here was therefore objectively justified and within the margins available to a nationally elected legislature.
The judgment
The court held that a difference in treatment between persons in analogous or relatively similar positions is discriminatory if:
- it has no objective or reasonable justification;
- it does not pursue a legitimate aim: or
- there is not a reasonable relationship of proportionality between the means employed and the aim sought to be realised.
The court noted that Lindsay v United Kingdom ECHR Case 11089/84 had established that the different taxation of married and unmarried couples was justified. However, in this case it found that PM was not trying to compare himself to a married couple, but to a situation where a married father had separated and was in a comparable situation to an unmarried separated father.
Whilst the court had found that differences based on marital status were reasonable and justified (for example, McMichael v UK [1995] ECHR 16424/90 did not grant automatic parental responsibility to unmarried fathers), it was a general rule that unmarried fathers who had an established family life with their children were entitled to the same rights of contact and custody as married fathers (Sahin v Germany 30943/96).
In this case, the taxpayer had acknowledged and fulfilled his financial obligations to his daughter and the court could see no reason why he should be treated differently, with regards to tax deductions on maintenance payments, from a married father who had subsequently separated and divorced. The court said that:
'The purpose of the tax deductions was purportedly to render it easier for married fathers to support a new family; it is not readily apparent why unmarried fathers, who undertook similar new relationships, would not have similar financial commitments equally requiring relief.'
Article 14 in conjunction with Article 1 of Protocol No 1 had been violated. In accordance with Article 41 of the Convention, the court was allowed to 'afford just satisfaction to the injured party' and awarded E292 in respect of the pecuniary damage suffered by the loss of benefit of the tax deduction and costs of E7,900. Interest was also paid.
Joanne Sawyer, Legal Officer at Liberty, the human rights organisation that supported the case, said:
'This case again reinforces the importance of the state affording equal treatment to people who are in the same situation. Here, our client, like many formerly married men, paid maintenance for his daughter, but unlike married men, he was not able to benefit from a tax reduction, simply because he was never married to his daughter's mother. We are pleased that the court has recognised the inequality of this situation.'
Where will it all end?
It is not easy to see where this is all going to end. The Civil Partnerships Act 2004 will presumably lead to associated tax changes bringing registered same-sex couples onto an equal tax basis as married couples. It seems odd that unmarried heterosexual couples should then find themselves worse off. The immediate argument is that such couples do have the option of a legally recognised marriage, whereas same-sex couples did not. However, there may be heterosexual couples where one partner remains married to a third person and either cannot or does not want to divorce. There may also be those who do not wish to marry.
Philip Baker QC of Gray's Inn Tax Chambers who, with Tom de la Mere of Blackstone Chambers, acted in a pro bono capacity in this case, suggests that the case 'will not make a massive dent in the existing legal framework' as it is concerned with the maintenance of a child. That said, one does not have to look far to find possibly similar scenarios where the legal obligations relating to married and unmarried partners are the same.
Gone to the dogs
Consider the following as an example. Mr Big is a wealthy man and — following his death and the reading of his will — his wife, who he had supported financially for their married life, is surprised to find that he has left the whole of his estate to the local dogs' home. Rather upset, Mrs Big applies to the court under the Inheritance (Provision for Family and Dependants) Act 1975.
Section 1(a) of that Act provides that 'where … a person dies domiciled in England and Wales and is survived by … the wife or husband of the deceased … that person may apply to the court for an order under s 2 of this Act on the ground that the disposition of the deceased's estate … is not such as to make reasonable financial provision for the applicant'. The court upholds Mrs Big's application and awards a share of the estate to her.
Mr Big's business partner Ms Rich has sadly also died and left her estate to the local cats' home. Ms Rich had never married, but she had been living for many years with Mr House Husband, whom she had supported financially. After speaking to Mrs Big, he also applies to the court under the Inheritance (Provision for Family and Dependants) Act 1975, s 1A, which makes a similar provision for a person who 'was living in the same household as the deceased and as the husband or wife of the deceased'.
The court upholds his application and awards a share of Ms Rich's estate to him.
Perhaps there are two points to make at this juncture.
First, IHTA 1984, s 146 states that: 'where an order is made under the Inheritance (Provision for Family and Dependants) Act 1975, s 2 in relation to any property forming part of the net estate of a deceased person, then … the property shall for the purposes of this Act be treated as if it had on his death devolved subject to the provisions of the order'.
Secondly, the rights of spouses and civil partners under the Inheritance (Provision for Family and Dependants) Act 1975 will be to 'such financial provision as it would be reasonable in all the circumstances of the case for [them] to receive, whether or not that provision is required for his or her maintenance'.
By comparison, the rights of other parties under s 1 are limited to 'such financial provision as it would be reasonable in all the circumstances of the case for the applicant to receive for his maintenance'. I am not sure whether that difference is important for the equality of treatment that we are discussing here; it certainly does not take too much imagination to consider circumstances where, depending upon the size of the estate and the standard of living of the beneficiary, the amounts could be the same.
Anyway, after a period of mourning, Mrs Big and Mr House Husband meet to toast their respective successes in the court actions. But Mr House Husband feels that the least that Mrs Big can do is to pay for the celebratory champagne when he discovers that his share is subject to inheritance tax, whilst hers is not. Mr House Husband may later be considering an appeal to the European Court of Human Rights as the legal basis of his case seems rather similar to PM v UK; there is a legal obligation to make a payment for the maintenance of a family member, whether married or not, yet the tax treatment of the payment to an unmarried partner differs from that to a married one.
Going separate ways
Another scenario that comes to mind is separation and divorce. It is well known that transfers of assets between spouses who are living together are treated as having been made on a 'no gain/no loss' basis for capital gains tax purposes. Close examination of the legislation, TCGA 1992, s 58, shows that this rule applies where a couple are living together 'in any year of assessment' and HMRC's Capital Gains Tax Manual at paragraph CG22203 confirms that 'where a husband and wife separate during a year of assessment transfers at no gain/no loss can be made between them for the remainder of that year'.
Let us suppose that Mr and Mrs Acrimony decided to separate permanently in May 2005. There is some disagreement over the division of assets, but things move fairly swiftly and a few months later the court orders that Mrs Acrimony should transfer their jointly-owned holiday cottage into Mr Acrimony's sole name. The cottage is not their main residence and has increased substantially in value since purchase. Provided that it takes place before
6 April 2006, the transfer will be treated as having been made on a 'no gain/no loss' basis.
The adjoining holiday cottage was purchased at the same time several years ago by Ms Witty and Mr Riposte, who have lived together for many years without marrying. Unfortunately, they have also decided to separate at the same time; are the two events unconnected, the more imaginative might wonder! In this case, Mr Riposte has substantial assets in his name and the court orders that he should transfer his share of the cottage to Miss Witty.
I am sure that you are ahead of me now. Mr Riposte has a substantial chargeable capital gain on this disposal whereas Mrs Acrimony does not. Would this fall within the parameters of PM v UK? Again we have similar legal obligations on people who are no longer living together as husband and wife, but with differing tax treatment.
Remember that in both of these scenarios — inheritance tax and capital gains tax — we are not comparing unmarried persons with married, but the legal rights and obligations of partners who are not, or who are no longer, married.
Civil partnerships
We have not yet seen the detailed tax changes for same-sex civil partnerships, but the intention is that they will be afforded the same tax treatment as married couples, seemingly leaving unmarried heterosexual couples comparatively worse off 'tax wise'. The aforementioned Inheritance (Provision for Family and Dependants) Act 1975 already takes account of this legislation. S 1(a), which previously referred to 'the wife or husband of the deceased' will instead — from a date to be appointed — read 'the spouse or civil partner of the deceased'.
Now that is not unexpected, but while s 1A (which, as noted above provides for a person who 'was living in the same household as the deceased and as the husband or wife of the deceased') remains in force, the Civil Partnerships Act 2004 inserted a new s 1B, which makes the same provision for a person who 'was living in the same household as the deceased and as the civil partner of the deceased'.
Now just a minute, hasn't this taken us into a whole new territory? Not only do we have a situation where unmarried couples have the same rights as married couples, but same sex couples that have not registered as civil partners appear to have similar rights to those that have registered. Logically, I guess that there is no good reason why this should not be the case; if unmarried couples are afforded similar rights to married why should unregistered same-sex couples not have similar rights? But it seems to me that, following in the relatively small (and, for the Government, relatively low-priced at £195) footsteps of PM v UK, we could be starting to take some extremely long and very expensive strides into the distance.
What about the kids?
Reading on through the Inheritance (Provision for Family and Dependants) Act 1975, I see that a child or someone who 'was treated by the deceased as a child of the family in relation to that marriage (or civil partnership)' [this last part in parentheses has yet to come into force] has the right to apply to the court for financial provision for maintenance. Does that mean that they would be entitled to receive an amount free of inheritance tax? Presumably not, on the basis that we are then no longer comparing the post death/post separation position of spouses and civil partners with those who were, to all intents and purposes, in a similar position to spouses and civil partners.
However, returning to the 'life partners' scenarios, what about the — presumably not unusual — situation of a person who was not a spouse or civil partner — let's say Mr Nice — who is left part of an estate by his partner — Ms Kind.
Mr Nice would thus have a potential inheritance tax liability. Could he find himself in a worse position than if Ms Kind had left all her money to the local dogs' home and Mr Nice had had to apply to the court for maintenance?
As we have seen, a spouse with such a legal right under s 1(a) would be entitled to an inheritance tax exemption and, following PM v UK, an unmarried partner, such as Mr House Husband above, could possibly rely on a similar legal right? Why should our Mr Nice now be at a disadvantage just because he has been left an estate or share thereof by someone who, even if she had not recognised or realised that she had a legal obligation to make provision for a dependant, had at least recognised that she had a moral duty to do so?
Living together
The more that I look into this subject, the more I get the impression that this is 'a house of cards'. The Government argued in this case that the different tax treatment 'promoted the institution of marriage'. Yet the Department of Work and Pensions' Guide for Decision Makers referred to the concept of 'living together as husband and wife' (LTAHAW), stating that 'a couple who are LTAHAW should be treated in the same way as a married couple. The principle behind this is that an unmarried couple should not be treated more or less favourably than a married couple.'
It seems to me that the Government is trying to have its cake and eat it here.
I have also not yet mentioned the Special Commissioners' decision in Holland v CIR [2003] STC (SCD) 43. A claim to the spousal inheritance tax exemption was refused in the case of a LTAHAW couple. Space prevents a detailed examination of the case, but several interesting points were made, and in their conclusion the Commissioners did consider that if discrimination on the grounds of status did infringe the Convention rights of heterosexual unmarried couples 'there would be no reason to stop there. The same arguments would apply to same sex couples and within the context of the Taxing Acts, to any group of individuals in financially interdependent relationships'. One wonders if that case might now be decided differently.
The good tax guide
So, where will it all end? Perhaps we should now be recommending that all those who are considering entering into 'a meaningful relationship with a significant other' should attend tax lessons beforehand. Perhaps if the parties had a more realistic understanding of how important tax would be to their relationship, there might be less misunderstandings and fewer break-ups caused by unexpected tax problems!
Bearing in mind the 'PM' part of this case, I do wonder if we might soon be seeing the sun setting on tax implications that are dependent upon personal relationships. After all, does not the government take the view that tax should not play a significant part in an entrepreneur's decision as to which business vehicle should be used in a new venture? So why should tax treatment be an important factor in determining the new personal relationship that one might enter into? Will we see the Government and HMRC, at some future point, throw up their collective hands and decide that the only way to treat everyone equally is as individuals whose transactions with any and all other individuals are to be dealt with on exactly the same basis? True tax equality achieved at last!
