At the time of marriage or divorce, understandably, estate planning is not usually a priority.
Alison Oliver explains why you should be careful about your finances when making such a significant change in your life.
Whilst not the most romantic of reasons, marriage does have many tax advantages and a divorce can have a significant tax cost, so it is worthy of serious consideration given existing arrangements may no longer be valid or applicable.
The impact of marriage applies equally to Civil Partnership
When you marry, an existing will is automatically revoked and is no longer valid, unless it was prepared in contemplation of a marriage to that person.
If you do not make a new one, then when you die the law of intestacy decides how your assets are divided. This may not accord to your wishes and if you have children, they will inherit part of the estate should its value be greater than £250,000 (in England and Wales – note that the rules are different in Scotland).
This can create financial difficulties for the survivor and complicate matters, particularly where there are children from a previous relationship. It may also result in an unnecessary inheritance tax liability.
In contrast, a divorce does not render a will void or invalid. Instead, at the date of the decree absolute any gift to your former spouse takes effect as if they had died at that date.
This usually results in the gift falling back into the residue of your estate. If as in many cases the residue of your estate is left to your now ex-spouse, then the effect is that the rules of intestacy, once again, decide how your estate is distributed.
In cases where there are no children or grandchildren then the value could revert to parents, siblings, grandparents, uncles or aunts, or even the Crown rather than as you would choose.
Imagine a scenario for example where Joe marries Jenny following his divorce from Helen, with whom he has 3 children. Joe and Jenny live in a property owned by Joe in his sole name, his only real asset following his divorce. Joe never gets around to redoing his will which left all of his assets to Helen.
Joe dies and the house is worth £1.5 million. Jenny inherits the first £250,000 of estate and 50% of the remaining value, with Joe’s 3 children inheriting the balance (some £625,000).
As you could anticipate, disputes begin over the ownership of the house, potentially forcing a sale and Jenny having to move. In addition, inheritance tax will be payable on the children’s share of the house, which depending on the date and history of gifts will be a minimum of £50,000. Whilst Joe may well have wished to make provision for his children, forward planning could have enabled this to happen whilst also protecting Jenny’s position.
If your will appointed your ex-spouse as an executor, the impact is still as if they had died when the decree became absolute and they would not be able to act even if you would have so wished.
This can complicate the probate process as it will be necessary for someone who is eligible to be the ‘administrator;’ of the estate to apply (usually surviving spouse, or child, or a beneficiary under intestacy rules)
Equally if they were appointed as a trustee in the will, the same would apply, even if the trust was for the benefit of both your children, and thus potentially the trust could fail. You may also need to re do any lasting powers of attorney.
A new will post divorce allows you to
If you are getting married, you can get the will sorted in advance as part of your wedding planning process. Equally, you do not have to wait until you are divorced to write a new will and it is important to consider this soon after separation.
As always, seek professional advice early in the process to minimise any taxes involved, unless of course you are happy for the Exchequer to be a beneficiary of your domestic changes!!
In terms of the divorce process itself and any financial settlement, there is no inheritance tax on the transfer of assets up to the date of decree absolute, as any transfers are still covered by the spousal exemption for same domiciled spouses.
Even after that date, HM Revenue & Customs generally accept that the financial settlement contains sufficient consideration, so there is no IHT charge, particularly if there is a court order in place.
In the unlikely event that this does not apply, the transfer is likely to be a potentially exempt transfer and there will be no charge to inheritance tax if the transferor survives seven years.
If either of the individuals concerned are non-UK domiciled (i.e. they have an overseas origin and do not intend to stay permanently in the UK), or not resident, then the tax positions may change and there may be overseas issues to consider.
Equally, there may be other taxes to consider that may have an impact.
Also bear in mind that if there are assets held in trusts in which interests are assigned as part of a settlement this may have different implications for inheritance tax.
The law surrounding marriage and divorce is complex and it is important to seek the right advice to ensure that financial pitfalls are avoided, and any planning opportunities utilised.
If you would like to discuss the issues raised in this article, please contact a member of our team.