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Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.
January is “divorce month”, in line with the advertising and marketing departments of household regulation companies, which historically spin the road about spousal Christmas bust-ups resulting in new 12 months marriage breakdowns.
Is that this true? I had a press launch from a agency of solicitors claiming that truly it’s March that marks “peak divorce”, in line with their evaluation of 20 years’ price of courtroom information. Regardless, the announcement that Hollywood superstars Brad Pitt and Angelina Jolie had finalised their break up after eight years of authorized wrangling ensured divorce was all around the new 12 months information bulletins.
It doesn’t matter what month a petition is filed, divorce carries a excessive emotional and monetary value — much more so whether it is acrimonious. One dreads to assume what the Jolie and Pitt authorized advisers have earned in charges since 2016. So when a 50-something couple that I’m pals with playfully introduced within the pub that they had been pondering of getting divorced for monetary causes, I used to be intrigued.
To protect their anonymity and within the spirit of the flicks, I’ll name them Mr and Mrs Smith. Mark is the breadwinner, on a very good wage with a pension price greater than £1mn. In the meantime, Kirsty has mere crumbs in her pension having stepped again from her profession in finance to lift their two kids.
The chancellor’s shock Funds day transfer to make pensions subject to inheritance tax renders them impotent as a posthumous tax-planning instrument for rich households. In future, spending the cash or gifting your kids an early inheritance will probably be extra tax environment friendly.
Nevertheless, any pension withdrawals past the tax-free lump sum (often 25 per cent) will appeal to earnings tax, disadvantaging {couples} such because the Smiths who’ve one pension between two. Therefore their madcap plan to stage a divorce and use a pension-sharing order to separate the pot between them, permitting Kirsty to make withdrawals at a a lot decrease tax price.
Mark stated if their second residence by the ocean turned Kirsty’s major residence, they may additionally dodge the newly imposed council tax of 200 per cent on it. As soon as retired, he would promote up in London; the couple would get again collectively, stay by the ocean and remarry to seize the inter-spousal inheritance tax advantages. So what did I consider their plan?
Ignoring the questionable ethics, I puzzled if the upheaval and authorized prices would justify the financial savings. When Kirsty declared she would solely go forward if she may spend a great deal of cash on an enormous second marriage ceremony and lavish honeymoon, their fantasy tax-avoidance plan was actually scuppered.
However our pub dialog illustrates how essential your marital standing has change into on the earth of economic planning. Reasonably than get divorced for cash causes, it will make extra sense for thousands and thousands of cohabiting British {couples} to get married.
Proposed pensions and IHT changes make marriage and civil partnerships extra enticing, as property might be transferred tax-free between spouses upon the primary dying. This avoids doubtlessly life-changing tax payments if one among you dies.
As tax allowances shrink, it turns into far more vital for spouses or civil companions to maximise each of their Isas and allowances for curiosity on financial savings, dividends and capital beneficial properties tax, says Lisa Caplan, a chartered monetary planner at Charles Stanley.
Had Mark been paying £20,000 a 12 months into Kirsty’s shares and shares Isa, for instance, this might afford the Smiths extra tax-efficient flexibility with their future retirement spending.
Put up-Funds, gifting money has change into a way more vital characteristic of tax planning. But even when their very own marriage is rock strong, rich {couples} making massive items typically fret about their grownup kids. Advisers report elevated curiosity in using trusts to guard items within the occasion of grownup kids divorcing, in addition to using cohabitation agreements if a companion strikes in, stopping them from making any future declare on the property.
Prenuptial agreements could not sound romantic, however are additionally becoming more commonplace. These allow {couples} to set out what’s mine (and yours) earlier than they wed within the occasion of a later break up. The Regulation Fee has just recommended — once more — they need to change into legally binding.
It’s not simply the Financial institution of Mum and Dad insisting on these; the development for getting married later in life means extra {couples} may have independently constructed up property they may wish to protect. Legal professionals inform me pre-nups are much more frequent in second marriages; {couples} typically wish to guarantee a share of their property passes to their very own kids.
After all, all these relationship insurance coverage insurance policies have vital authorized prices connected. Nonetheless if I had been a regulation agency writing a January divorce month press launch, I’d stress they might be minuscule in contrast with the worth of the property at stake.
Claer Barrett is the FT’s client editor and the creator of ‘What They Don’t Teach You About Money’. claer.barrett@ft.com Instagram @Claerb
