How To Protect Inheritance On Divorce: is a Prenuptial or Postnuptial Agreement the answer?

Protect Inheritance On DivorceSophie has contacted me for urgent advice. She wants to know how to protect inheritance on divorce. Her partner, Bob, has whisked her away to Rome for the weekend, gone down on one knee, and proposed. But she’s having cold feet because what happens if it doesn’t work out? She doesn’t want Bob to get his hands on the fortune she’s inherited from her family.

On marriage breakdown every asset is up for grabs. 
But it has to be a "matrimonial asset" unless there is a strong case based on need.
It is sometimes possible to protect inheritance on divorce.

Is An Inheritance A Matrimonial Asset?

It depends.

Often an inheritance is regarded as non matrimonial and so not up for grabs, particularly if it’s a short marriage. And timing is important. Was the inheritance received before or during the marriage, or as the couple separated? Even though Sophie inherited before getting married it could be bad news if she and Bob split up after a long marriage. It depends on what happens to the inheritance in the meantime. Will the couple mix it with their matrimonial assets? Will they keep it separate?

The more separate it’s kept the better, but still that’s no guarantee.

What About “Needs” When Assets Are Divided On Divorce?

The starting point for division of matrimonial assets is an equal split but certain circumstances are taken into consideration including:

  • The Children’s Welfare
  • Income and Earning Capacity
  • Financial Needs
  • Standard Of Living
  • Your Ages, And Length Of The Marriage
  • Physical Or Mental Disabilities
  • Contributions To The Marriage

What if an equal division doesn’t provide enough for a suitable home for one of the couple? They are likely to get a larger share of the assets. And if there aren’t enough matrimonial assets? Non matrimonial assets can be thrown into the melting pot to meet needs. This includes an inheritance.

The Millionaire Who Lived In A Three Bed Semi

A Court case in 2011 throws some light on how to protect your inheritance on divorce. It’s called K v L. We don’t know the couple’s names or where they lived as the Court agreed to protect their anonymity for the simple reason that they wanted their three children to lead normal lives.

This is the story of an extremely wealthy wife. 
Neither of the couple ever needed to work but despite the wife’s millions 
they lived modestly in a three bed semi worth £225,000. 
They ran an inexpensive car and no single item in their home was worth more than £500.

The wife had inherited shares in an Israeli company when she was fifteen. When the couple first cohabited in 1986 the shares were worth £300,000. When they married in 1991, £700,000. When they separated in 2007, £28m. By the time of the court hearing in 2011, £57m.

After twenty one years of marriage the wife left the husband in 2007 taking the children with her. She bought another modest property in the same London suburb, close to the husband who remained in the family home.

The husband told the court he wanted £2m to buy a house in central London, and £450k to buy a house in Israel. Also £60k to buy a new car. And maintenance. All in all he claimed £18m. But the court said the wife’s inheritance was a “non matrimonial asset” and on a generous assessment of his needs he would only get £5m. He was not otherwise entitled to share in her inheritance.

Will A Prenuptial Agreement Protect Inheritance on Divorce?

K v L was an unusual case and relied heavily on the modest lifestyle of the couple. I told Sophie not to worry. She could take steps to protect her inheritance on divorce with a prenuptial or post nuptial agreement. She liked the idea and said she would talk it over with Bob. I have written an earlier blog on the topic of agreements.

How To Protect Inheritance On Divorce

Contact  Joanne Houston on 01962 217640 for free advice about how to protect your inheritance on divorce. In this 20 minute session we will review your situation and how you can achieve your objectives.


JUST FAMILY LAW are specialist divorce and family law solicitors offering personalised legal solutions. We offer collaborative law which is especially relevant in providing solutions tailored to your family’s needs. This includes same sex couples and their families. Visit our website just-family-law.com The topics covered in this blog post are complex and are provided for general guidance only. Therefore if any of the circumstances mentioned in this blog have application to you, seek expert legal advice.

Image  A Baby Wild Boar by Sander van der Wel on Wikimedia Commons

 

 

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Tax And Divorce – Whether UK Or Non UK Resident, You Need To Consider Income Tax, Capital Gains Tax and Inheritance Tax Liability

Our guest blogger, Megan Saksida 

“The impact of tax on divorce can be critical, especially for international families. It’s vital to take expert advice from an accountant when considering a financial settlement. I’ve set out the main points to consider in this blog, and a brief Summary at the end,” says guest blogger Megan Saksida, Chartered Accountant, of Meganomics and lecturer and writer on private client taxes.

Divorcing? There are likely to be tax implications. But firstly, where do you both live?

How long have you been non resident? Do either of you intend to return to the UK? All these questions have tax consequences.

An expat who doesn’t work may find on a “day count” basis he or she is tax resident in the UK despite living elsewhere in Europe. This could be because you go back and forth to the UK.

And did you know you can be resident for tax purposes in more than one country? It could be necessary to consider the Double Tax Treaty to determine which residence takes precedence.

How does Non-Resident Capital Gains Tax (“NRGCT”) apply to your residential property in the UK on divorce?

Residential property is usually the major asset in a divorce settlement. For both resident and non resident tax payers there can be tax implications.

“NRGCT” is charged on gains accruing on disposal of UK property if it is not exempt under main residence rules (see below), and you are not resident in the UK in the tax year in which the transfer occurs.

Please note – the NRCGT rules take precedence over the temporary non-residence rules (see below).

What are the tax rates? Eighteen and twenty eight percent (depending on your personal circumstances), and only gains made since 6 April 2015 are taxed.

There are three methods for calculating NRCGT gains:

  • The default method, which applies unless you elect otherwise. This uses the market value as at 6 April 2015;
  • Apportionment of the whole of the gain/loss over the time the property was owned;
  • The whole gain or loss (which is only advantageous for a loss).

Can UK property be elected as a non-resident couple’s main residence in order to reduce tax on divorce?

Yes, you can make an irrevocable main residence notification on the NRCGT Return. This can apply retrospectively to any period of prior ownership.

Is there an existing nomination? The nomination on the NRCGT Return is treated as superseding it.

Please remember it is essential both of you affirm this nomination to HMRC, irrespective of which party legally owns the property.

If only one of you owns the property you must submit a Return with a written notification from the other confirming agreement to the nomination. This is because the rules state a couple can only have one main residence between them.

What qualifies as ‘the main residence’ in order for the gain to be exempt?

The property needs to be occupied as your permanent residence.

If you are non resident, you will have an additional burden of proof which is the “day count” test. What’s the “day count” test? This is where you are present in the dwelling for at least ninety midnights in a year. And if your spouse or civil partner was in the property instead, this will count towards your total.

Do you have more than one UK residence? All stays at both dwellings count towards the ninety day test.

If the “day count” test is reached and the home is eligible for main residence relief, no chargeable gain arises for UK tax purposes irrespective of your country of residence at the time of the divorce.

But be warned –  your tax position in your country of residence also needs to be considered.

Is the former main residence for CGT purposes still owned by either of you? What’s the significance of the 18 months rule?

If the property was your former main residence for CGT and it continues to be owned by either you or your ex more than eighteen months after the other leaves the property, then tax may be payable when the property is sold.

This means the leaving spouse should take tax advice if you continue to own the former marital home even though you no longer live there.

Don’t forget the NRCGT time limits

An important practical point to note is if you make a NRCGT disposal you must report the disposal to HMRC within thirty days. Tax on NRCGT gains is generally due thirty days after sale.

What about tax on divorce on everything other than residential property? What are the rules?

  • UK residents are taxed on worldwide income and gains.
  • Non UK residents are only taxed on income generated in the UK.
  • Non UK residents are not taxed on capital gains unless they become “temporarily non resident” (see below), although the rules for gains on residences and businesses are different.

Are you resident, or non resident, in UK for tax purposes?

What is the test for residence?

It’s complicated but boils down to day counts, working hours, the availability of a home in the UK, or your personal ‘ties’ to the UK.

How does this apply in practice?

I’ll give you an example. Say if you live in France, own a home in the UK, and don’t work. Your minor children are at a boarding school in the UK and you spend the school holidays with them in the UK. For tax purposes you might be defined as resident in the UK. How is this relevant to divorce? You could be liable in the UK for your worldwide income and gains under the terms of your financial settlement.

During the marriage you may have been non UK resident for tax purposes, but you now wish to return to live in the UK. What does this mean for tax on divorce?

It depends how long you have been out of the UK and a non UK tax resident, and when the marital assets are sold or transferred.

Are you “Temporarily Non-Resident”?

A non UK tax resident living outside the UK is not taxed on their capital gains unless they are deemed “temporarily non-resident”. This happens when you live outside the UK for less than five years, and you were a UK tax resident for at least four of the previous seven tax years prior to leaving.

If this applies to you, any capital gains made while living outside the UK, on assets held before you departed the UK would become chargeable in the year of your return to the UK. This means even if there was no initial liability to CGT because you were non resident for tax purposes, the charge would now apply.

What is the significance of the date of separation on tax on divorce?

It’s crucial.

A trial separation is not relevant, but permanent separation is relevant for both income tax and capital gains tax.

But when is a couple officially separated? For both income tax and CGT there are three possibilities:

  • There’s a Court order;
  • You have a Deed of Separation;
  • You are separated in circumstances in which the separation is likely to be permanent.

The third option depends on your individual circumstances. You will need to provide evidence to show when the decision was made to separate permanently, and it’s not necessarily the date one of you left the marital home.

Sometimes a decision may be made by one partner and not communicated to the other.

The date is crucial, especially for CGT.

What happens when matrimonial assets are distributed in the same year as the permanent separation in the case of a UK resident? 

First of all, income –

Both of you are taxed independently on income earned in the UK, and worldwide, and you have your own personal allowance.

It may be during your marriage you decided to share income from assets unequally to maximise tax efficiency. But on divorce the Court has wide powers to divide assets irrespective of ownership. The assets can be split equally or in other ways.

Please note – any prior declaration of beneficial interest to HMRC ceases to have effect after permanent separation, and you will be taxed according to your actual beneficial ownership.

Secondly, capital –

In the case of CGT, if you transfer assets to each other under the financial settlement in the tax year of the permanent separation, this is on a “no gain, no loss” basis, just the same as during the marriage.

But there’s a rule – you must have lived together at some point during the tax year.

Assets are distributed in a tax year after permanent separation, but before divorce. What are the implications for tax on divorce for a UK resident?

In the case of CGT, if assets are exchanged in a tax year during which you are not living together, but before decree absolute (which brings your marriage to an end), it’s bad news.

This is because the assets will be deemed to be transferred at market value, and CGT could be payable. This is the case even if no money has been exchanged.

What happens if a non UK resident permanently separates in the same year as the assets are distributed?

You are not liable for CGT for any capital disposals in the divorce settlement except residential property (see above) and business assets.

Even if you return to the UK during or after the divorce, the rules for “temporary non-residence” are not relevant, as the transaction is excluded under the “no gain, no loss” rules.

What is the liability of a non UK resident when assets are distributed in a tax year after permanent separation, but before divorce?

Any assets transferred in a tax year during which you are not living together, but before the decree absolute, would not be subject to CGT if you are non UK resident (except for residential property).

But there could be a tax charge in the country in which you live, and local tax advice should be sought.

If you choose to return to the UK and are rendered “temporarily non-resident” (see above) CGT could be chargeable.

What about Inheritance Tax?

Liability to Inheritance tax depends on the date of the decree absolute. Before, transfers on divorce are not chargeable. After, they are only chargeable if there is intent to confer gratuitous benefit.

But be careful if one of you is domiciled UK and the other not. There are restrictions on how much can be transferred and tax advice must be taken.

What about your, or your ex’s, unused IHT nil rate band?

If one of you dies after divorce and hasn’t remarried any unused nil rate band will remain unused.

Maintenance to children and former spouses, and gifts to children. Liable to IHT?

Maintenance to children and former spouses is exempt from IHT, but gifts to children not for their education, maintenance or training, could be chargeable if not habitual, and out of income. It’s best to take tax advice in these circumstances.

In Summary

Always consult an accountant

Whether you live in the UK or elsewhere, always consider your potential liability to tax on divorce. Consult an accountant.

Even if you don’t live in the UK, you can be liable to CGT on the sale or transfer of UK  residential property

Can you claim exemption under main residence relief?

Beware the 18 month rule …

Beware of either or both of you retaining a property, nominated as a main residence, for eighteen months after divorce – you can find yourself with an unexpected CGT liability.

… or being deemed a UK resident …

Even if you don’t habitually live in the UK, the Statutory Residence Test legislation may consider you do for tax purposes. You could end up being liable to pay CGT on the sale or transfer of assets in the UK and elsewhere.

… or temporarily non resident

Think you are excluded from CGT liability because you were non resident for UK tax purposes? If you return to the UK you may become liable because HMRC may consider you were only “temporarily non resident”.

Liable to pay tax in more than one country?

The Double Tax Treaty is helpful on this point.

WARNING – date of separation and date of divorce

The date of permanent separation, and the date of the decree absolute (which brings your marriage to an end), are crucial when considering liability to CGT. Whether you live in the UK or elsewhere, you might find yourself with an unexpected tax bill. You need to consult an expert family law solicitor to navigate these tricky points.

And Inheritance Tax?

Divorce can have consequences for Inheritance Tax liability.

Contact Megan Saksida on +44 7521 082 546 or Email: meg@meganomics.co.uk Contact Joanne Houston of Just Family Law on 01962 217640 for a FREE telephone consultation on any family law issue

JUST FAMILY LAW are specialist divorce and family law solicitors offering personalised legal solutions.

Visit our website just-family-law.com

The topics covered in this blog post are complex and are provided for general guidance only. If any of the circumstances mentioned in this blog might have application to you, you should seek expert legal advice.

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10 Reasons Why You Need A Family Law Solicitor To Check Your DIY Divorce Petition

1.     Is a DIY divorce petition worth the risk? Every year countless petitions are rejected by the Court, and anxiety and delay are experienced.

2.     Doing it yourself means you miss out on expert legal advice regarding financial issues and children. And a family solicitor can help if you are at loggerheads by guiding you towards an amicable agreement with the help of mediation or collaborative law

3.     It doesn’t have to be expensive to speak to an experienced family law solicitor. But please make sure you find a solicitor who offers “Pay As You Go Advice“.

How Hard Can It Be To Get A DIY Divorce Petition Right?

4.     Why do DIY divorce petitions get sent back by the Court? A common problem is service. Perhaps you don’t know the respondent’s address, or failed to check the process server’s statement of service is correct, or named the co respondent but failed to serve them. You might have forgotten to ask for your costs to be paid. You might have overlooked the option to apply for a financial order. Or you might simply have forgotten to tick a box.

5.     When it comes to applying for a financial order, you may think it’s a simple “Yes/No” answer. But are you sure you know all your legal rights? You don’t want to miss out on a fair share of the pensions, or the business, or to be left with your ex’s debts. You could end up regretting your DIY financial agreement for the rest of your life.

6.     Even if you have an agreement about the finances there can be serious implications if you don’t have a Court order recording it, because your ex can change his or her mind, or can come back for more. And did you know it’s risky applying for a Decree Absolute (which brings your marriage to an end) before you have a Court order?

7.     Legal definitions in the divorce petition can be confusing. Your “habitual residence” or “domicile” may not be immediately clear to you because both can change over time and according to your particular circumstances. If you are an international family this can be a complication.

What’s The Worst Thing That Can Happen to a DIY Divorce Petition? 

8.     Your DIY divorce petition can fail completely because you haven’t chosen the right reason for your DIY divorce, or not given sufficient detail. In my last blog I talked about the recent case of Owens v Owens which says the Court can refuse a divorce if the Respondent defends and the petition isn’t strong enough, particularly in the case of unreasonable behaviour.

9.     If you belatedly discover you’ve ticked the wrong box, or if you want to strengthen your DIY divorce petition, the only option is to apply to amend it. But amending a petition is not only costly – an extra £95 Court fee – it’s time consuming and fiddly too.

10.   Finally, you may be in agreement about the children but there’s no option to record this in the petition. It may be worthwhile having a word with a family law solicitor, particularly in the case of international families. Otherwise you might find yourself accused of child abduction (an imprisonable office).

Contact us on 01962 217640 for a free telephone consultation on this or any other family law issue

JUST FAMILY LAW are specialist divorce and family law solicitors offering personalised legal solutions.

Visit our website just-family-law.com

The topics covered in this blog post are complex and are provided for general guidance only. If any of the circumstances mentioned in this blog might have application to you, you should seek expert legal advice.

“Owl” by Mark Coleman on Flickr

“Eagle Owl” by M Shattock on Flickr

“Owl” by Chris Page on Flickr

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