Inheritance Tax and Divorce
Except in the rare cases where one spouse is domiciled in the UK and the other isn’t, there’s a complete exemption from Inheritance Tax (IHT) between spouses. Exactly the same applies to civil partners, and references in this article to spouses and married couples apply equally to civil partners.
The IHT exemption lasts as long as the marriage lasts. So, for example:
There’s still an exemption even if a married couple are separated
There’s still an exemption in the period in the period between the court making a decree nisi and that decree being made absolute.
Once the decree is made absolute, the IHT exemption comes to an end, but this won’t necessarily mean there’s an IHT charge on later transfers of cash or assets between spouses. For example, it’s clear that, when assets are transferred following a court order, there’s no IHT event, because there’s no intent to confer any gratuitous benefit.
A later voluntary gift could be caught by IHT, although gifts between individuals will usually be potentially exempt transfers, which are free of IHT if the donor lives another seven years. Occasionally a former spouse, or a child of the marriage, may become dependent on the other former spouse and in these cases there can be a limited exemption for maintenance of a dependent relative.
We recently came across an interesting use of the IHT spouse exemption, where a wealthy company owner (“Mr CO”) became seriously ill, with limited life expectancy, when his wife (“W”) was already taking divorce proceedings against him:
The company shares were being sold, so that there’d be no IHT relief for business property
The main intended beneficiaries were the children of the marriage
Mr CO gave W a very generous “divorce” settlement, but persuaded her that, by agreeing to a judicial separation rather than a divorce, their children could benefit from a much lower IHT bill on his death
Mr CO’s Will gave W the right to income from his estate. Because they were only separated, not divorced, the spouse exemption would still apply
Mr CO gave the trustees of his Will the power to bring W’s right to income to an end, so their children would benefit instead
Exercising those powers would trigger a lifetime potentially exempt transfer by W, which wouldn’t be taxable if she then lived seven years
Without this, nearly all of the children’s inheritance would have suffered 40% IHT on their father’s death.
Both spouses and former spouses have the ability to claim against their deceased former spouse’s estate if the Will, or whatever other arrangements transpire on the death, fail to make reasonable provision for them. Spouses will always be in a much stronger position to make a claim, and arrangements made on divorce will often provide that the divorced spouse’s right to make a claim is barred.
Note also that, if divorcing spouses make no change to their Will, the Will is read as if the divorced spouse has died at the time of the divorce, so any gift to the former spouse, or any appointment as executor, is automatically cancelled.
Published: September 2019
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