Rings, Heirlooms, and Tax: Jewellery's Role in Divorce and Estate Matters

Marriage and jewellery often go hand in hand, symbolising the union and commitment between partners. However, if the marriage ends in divorce, jewellery bought as gifts to demonstrate love can quickly become the focus of surprisingly complex issues, potentially leading to greater conflict. Here, Christine Thornley from Irwin Mitchell’s Private Client Advisory Team looks at some of the issues relating to Inheritance Tax, and Phillip Rhodes from the Family Team explains how jewellery is treated during proceedings.

When it comes to divorce, jewellery is treated like any other asset within a person’s estate. Once a divorce is finalised, the inheritance tax exemption between spouses ends. This means that the transfer of items such as wedding or engagement rings between ex-spouses may be subject to inheritance tax if a party subsequently passes away, unless part of a court-ordered settlement

For inheritance tax purposes, once someone has passed away, it is important to have an accurate and up-to-date valuation of the jewellery so that it can be properly declared to HMRC. Once the jewellery's value is determined, it is included in the total estate value. If the estate exceeds the threshold of £325,000, inheritance tax will be payable on the amount above the threshold.

Gifting 

If you plan to gift jewellery, the same rules apply as with other assets. To remove the jewellery from your estate and avoid inheritance tax completely, you must survive for seven years after making the gift. Additionally, you cannot retain any benefit from the gifted jewellery. For example, you cannot gift a piece of jewellery to your daughter but continue wearing it.

Although it may feel like an unnecessary formality when dealing between family members, proper documentation is important when gifting jewellery. This not only shows the intention behind the gift but also helps in reporting to HMRC if the donor dies within seven years. It is always recommended to keep a clear record of the gift, including the date, recipient, and value of the jewellery.

No Right to Reclaim

Once a gift is made, the donor has no right to reclaim it. This means you cannot ask for the jewellery back or continue to benefit from it in any way.

In summary, treating jewellery as part of your estate during divorce requires careful consideration of its value, proper declaration to HMRC, and understanding the implications of gifting.

Divorce Proceedings

In England & Wales, the division of assets as part of a divorce is governed by the Matrimonial Causes Act 1973. The court aims to achieve a fair distribution of assets, considering factors such as the length of the marriage, the needs of each party, and their contributions to the marriage. Jewellery, like other personal belongings, is subject to these principles.

Disclosure and Valuation

During financial proceedings, both parties must provide full and frank disclosure of their assets, including jewellery. This is achieved using a comprehensive document known as Form E, which mandates the disclosure of all assets worth more than £500. Each piece of jewellery must be itemised and valued, and its worth considered as part of the overall settlement.

Return of Engagement Ring

It is generally accepted that a spouse can retain their jewellery, whether it was bought or gifted to them. This principle applies to engagement rings, and under the Law Reform (Miscellaneous Provisions) Act 1970, an engagement ring is presumed to be an ‘absolute gift’ unless this presumption can be rebutted with evidence, for example, that there was an express intention at the time the engagement ring was gifted, that it should be returned if the marriage does not go ahead or breaks down.

An Exception - Sentimental Value

Jewellery often carries significant sentimental value, which can complicate its treatment as part of a divorce financial settlement. Courts may consider the emotional attachment to certain pieces, especially if they are family heirlooms. In some cases, the sentimental value may lead to negotiations where one party keeps the jewellery in exchange for other assets of equivalent value or sentiment.

In practice, divorcing couples are encouraged to reach an agreement outside of court, including the division of jewellery and other personal belongings. Non-court dispute resolution methods such as mediation, arbitration, and collaborative law are effective ways to resolve disputes amicably. If an agreement cannot be reached, the court will intervene and make a decision based on fairness and the specific circumstances of the case.

To avoid disputes over jewellery in the event of a divorce, couples can include specific provisions in a pre-nuptial or post-nuptial agreement. Understanding the legal principles and seeking professional advice can help ensure a fair and amicable resolution.