Dividing assets in a divorce is challenging enough but it can become even more fraught when decisions affect what you might be able to leave your loved ones in future.
Inheritance tax only starts becoming an issue if you have assets worth £325,000 upward, or £650,000 while you are still married.
But there are other issues for people who are less well off to consider, like who is currently nominated to receive your work pension if you die, and who now holds power of attorney should you be incapacitated.
Your legacy: What to consider when it comes to passing on assets to loved ones after a divorce
‘At the time of divorce, personal finance and security tend to be the primary concern,’ says Michelle Holgate of RBC Brewin Dolphin.
However, she stresses that it is worth thinking about inheritance tax and other legacy implications, and recommends getting advice on the split of assets and pensions and your future personal position.
Melissa Henderson of BRI Wealth Management, says sometimes months or even years are spent negotiating asset division, child custody and maintenance payments, but estate planning should be addressed too.
We look at what to consider when it comes to passing assets to loved ones after a divorce.
And below, Hannah Mugleston of Stowe Family Law explains how anything you yourself inherit before you get divorced might be divided.
1. Review your inheritance tax position
Ex-partners are treated separately for inheritance tax purposes at the point that a marriage or civil partnership is dissolved, says Michelle Holgate, divisional director of financial planning at RBC Brewin Dolphin.
‘Interspousal exemption is lost and as such inheritance tax will crystallise on the death of each individual separately where previously they may have planned to pass all of this free of inheritance tax, on first death to the remaining spouse.’
Divorce ends the ability to transfer your ‘nil rate band’ or ‘residential nil rate band’ – the thresholds above which the 40 per cent inheritance tax rate is applied – to your ex-spouse. See the box on the right.
‘Dependent on the level of assets each party holds post divorce you may not be entitled to a residential nil rate band at all if you do not have a property or your assets exceed the limits, which would lead to the residential nil rate band being reduced to zero,’ adds Holgate.
Melissa Henderson, chartered financial planner at BRI Wealth Management, says: ‘Upon divorce, you will only have available your own inheritance tax allowances which are the £325,000 nil rate band and the £175,000 residence nil rate band where your main residence is left to a direct descendant.
‘You will no longer inherit your ex-spouse’s allowances should they predecease you.
‘This means that if you have significant assets above £500,000, then you may need to consider changes to your estate planning.’
2. Change your will
Seek legal advice as early as possible after you separate to update your will so that it reflects your current wishes, warns Henderson.
‘If you do not have a will in place, it is important to implement one as soon as you are separated as the intestacy rules would apply.
Melissa Henderson: Seek legal advice as early as possible after you separate to update your will
‘Under intestacy, until the decree absolute is granted, you are still married in law so your spouse will have an entitlement to your assets.’
3. New power of attorney
Lasting power of attorney is a legal failsafe for people who can no longer fend for themselves.
It involves appointing someone you trust, usually a family member or friend but sometimes a paid professional, as an attorney to take control of your affairs
‘If you have powers of attorney in place, the options you have available will depend on whether you have included replacement attorneys in the original document – designating who can replace your ex-spouse,’ says Henderson.
‘If your ex-spouse was the only attorney, the lasting power of attorney will come to an end.
‘If you have another attorney alongside your ex-spouse, but the LPA stipulates that they must act jointly rather than jointly and severally, then the LPA will also come to an end.’
This is because when attorneys are appointed jointly and severally, each has the authority to make decisions independently of the others, she explains.
‘Speaking with a solicitor can help clarify whether your LPA is still an effective legal document for you.’
4. Inheriting pensions and death benefits
‘As with your will, it is also important to update your “expression of wishes” form for your pension benefits and any beneficiaries of life insurance policies so that these funds pass to your intended recipients,’ says Henderson.
Michelle Holgate: Ex-partners are treated separately for inheritance tax purposes at the point that a marriage or civil partnership is dissolved
‘You should also update – or check if you have – any death in service nominations in place at work. The nominations specify who should receive the benefits available in the event of death while still employed.’
Michelle Holgate says: ‘Any spouse may be listed as the beneficiary of your pension schemes or any death in service benefits for example. These will all need to be revisited for their ongoing suitability.’
> Who inherits your work pension when you die? Tell your scheme your wishes
5. Check how property is owned
If any property is held as ‘joint tenants’, ask a solicitor to help determine whether you should change the ownership to a tenancy in common after a separation, says Henderson.
‘This would mean that the property would not immediately pass to your ex-spouse, but rather would form part of your own estate.’
6. Protect yourself against CGT
Capital gains tax is levied on profits from assets ranging from shares to second homes, buy-to-let properties and personal possessions.
There is an annual tax-free allowance, which is currently £3,000 a year.
Your main home that you live in, known as your ‘principal private residence’, is exempt from CGT. This can become significant when when one spouse moves somewhere else due to a divorce, but there are protections in this scenario.
‘Couples have up to three years after the year of separation to make a “no gain no loss transfer of assets”,’ says Henderson.
This is a transaction in which assets are transferred from one party to another without any profit or loss being realised, she explains.
‘Where there are assets subject to a formal court approved order, there is no limit on this time frame.’
When it comes to the family home, if an ex-spouse retains an interest in the residence following the divorce they will be able to claim the ‘private residence relief’ when it is sold, she explains.
‘The PRR may be claimed unless the spouse has declared another home as their principle private residence.
‘For arrangements that are likely to be more complex, it’s worth considering speaking to an accountant and a solicitor to ensure all is in order.’
Holgate says: ‘As part of the divorce process it would be worth considering whether it is right to split any assets or investments held that are currently at a loss compared to their original purchase value as well as those that carry capital gains.
‘If these losses are realised at a point in the future then they could be offset against the gains on other investments sold by the same individual.
‘This can become very complicated and financial advice could prove extremely valuable in these scenarios.’
What about an inheritance received BEFORE a divorce
Hannah Mugleston, a senior associate at Stowe Family Law, explains how assets previously inherited by one or both partners might be divided after couples split up.
Money tends to be one of the primary points of contention between divorcing couples, and inheritance sometimes more so than other assets, she writes.
Hannah Mugleston: Disputes can become complex if one party believes that the inheritance is an individual asset
It is often seen by individual parties as a sole asset and therefore not to be considered in the matrimonial pot upon divorce.
After all, if you have received inheritance from a parent, or other family member, why should your ex-spouse benefit from that when it was left to you? So some believe.
Matrimonial assets are assets, for example finances and property, that have been accrued during the marriage as a result of joint efforts from both partners.
Non-matrimonial assets are those that are brought into the marriage, or sometimes gained outside the marriage.
Inheritance, if received before marriage, may well be considered a non-matrimonial asset depending on how it was used.
The same possibility also applies to inheritance received after separation.
Matrimonial versus non-matrimonial asset disputes can become complex if one party believes that the inheritance is an individual asset, and non-matrimonial.
Legally, each case is reviewed uniquely, with weight given to various factors and circumstances affecting the separating couple.
The best, although not legally enforceable, way of ringfencing any inheritance is to have a prenuptial agreement drawn up before you get married (or a postnuptial agreement, if you’re already married) which details what should happen to any inheritance or other non-matrimonial assets if the marriage breaks down.
It is hugely important to get a comprehensive financial settlement, and a financial consent order given by the court, to protect any future inheritance
This could save a lot of stress and money.
One of the factors of reaching a financial settlement is the needs of each party, and if one spouse is to be left without sufficient finances to sustain their needs, then non-matrimonial assets may well be brought into negotiations.
Nuptial agreements are therefore important as they can be given sufficient weight by the court even in needs cases subject to the nuptial agreement being fair, up to date, both parties receiving legal advice, entering into the nuptial agreement voluntarily and their being full disclosure.
Looking towards the future, it is possible for divorcees to make a claim against their ex-spouse’s assets even after the divorce is finalised, but there is no financial order in place dismissing the claims.
This is why it is hugely important to get a comprehensive financial settlement, and a financial consent order given by the court, to protect any future inheritance.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.
