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Roula Khalaf, Editor of the FT, selects her favorite stories in this weekly newspaper.
January is the “month of divorce”, according to the marketing departments of family law firms, which usually coincides with Christmas disputes between spouses leading to the collapse of the New Year’s marriage.
Is this true? I had a press release from a law firm that says March is actually the “peak divorce”, based on their analysis of 20 years of court data. However, the release that Hollywood powerhouses Brad Pitt and Angelina Jolie have finalized their separation after eight years of legal wrangling has confirmed that the divorce is final in the new year.
No matter what month the petition is filed, divorce carries high emotional and financial costs—even more so if it’s unreasonable. One dreads to think what Jolie and Pitt’s legal advisers have earned in fees since 2016. So when a 50-year-old couple of whom I am friends playfully announced in a pub that they think about getting divorced for financial reasons, I was amazed. .
To preserve their anonymity and in the spirit of the movies, I will call them Mr. and Mrs. Smith. Mark is a breadwinner, on a good salary with a pension worth over £1mn. Meanwhile, Kirsty is struggling with her pension as she quit her finance job to raise their two children.
The Chancellor was surprised when Budget Day went to retire subject to inheritance tax it makes them less powerful as a post-death tax planning tool for wealthy families. In the future, spending money or giving your children an early inheritance will be more tax-efficient.
However, withdrawing pension money beyond the tax-free amount (usually 25 per cent) will attract income tax, a disadvantaged couple like the Smiths who have a pension as one between the two. So the madcap plans to set up a divorce and use a pension sharing order to split the pot between them, allowing Kirsty to take the money out at a much lower rate of tax.
Mark says that if their second beach house becomes Kirsty’s main residence, they can avoid the newly imposed 200 per cent council tax on it. As soon as he retired, he would sell in London; the couple would move back together, live by the sea and remarry to capture spousal inheritance tax benefits. So what did I think of their plan?
Ignoring the questionable ethics, I wondered if the upheaval and legal costs would justify saving the money. When Kirsty said she would only go ahead if she could spend a fortune on the second big wedding and honeymoon, their tax avoidance scheme was criticized.
But our pub conversation shows just how important your marriage status has become in the world of financial planning. Instead of divorcing on financial grounds, it would make sense to the millions of British cohabiting couples to marry.
Planned pensions and IHT changes make marriage and civil relations more attractive, as property can be transferred tax-free between spouses on first death. This avoids life-changing tax bills if one of you dies.
As tax returns continue to shrink, it’s becoming increasingly important for spouses or civil partners to maximize both their Isas and allowances for savings interest, earnings and capital gains tax, says Lisa Caplan, chartered accountant Charles Stanley.
If Mark was paying £20,000 a year into Kirsty’s stocks and shares Isa, for example, this would help the Smiths to be more tax-advantaged in their retirement spending.
After the Budget, to give money has become a very important feature of tax planning. However, even if their marriage is strong, wealthy couples who make large gifts often worry about their grown children. Advisors report increased interest in the use of trusts to protect gifts in the event of divorce, as well as the use of cohabitation agreements if a partner moves in, it prevents them from making any future claim on the property.
Prenuptial agreements may not sound romantic, but they are to be normal. This enables the couple to define what is mine (and yours) before they get married in case they separate later. Law Commission recently recommended – again – they should be legally binding.
It’s not just the Bank of Mum and Dad that insists on these things; the tendency to marry later in life means that many couples will have built up assets that they will want to keep. Lawyers tell me that pre-nups are even more common than second marriages; Couples often want to ensure that a portion of their assets pass to their children.
Of course, all of these relationship insurance policies have significant legal costs. However if I were a law firm writing a January divorce notice, I would emphasize that it would be small compared to the value of the assets at stake.
Claire Barrett is the FT’s consumer editor and author of ‘What They Don’t Teach You About Money‘. claire.barrett@ft.com Instagram @Claerb