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January is “divorce month,” according to the marketing departments of family law firms, which usually revolves around disagreements between spouses at Christmas leading to the breakdown of a marriage in the new year.
Is this correct? I received a press release from a law firm claiming that March is actually “peak divorce,” according to their analysis of 20 years of court data. Regardless, the announcement that Hollywood stars Brad Pitt and Angelina Jolie have finalized their separation after eight years of legal wrangling is among the divorce news in the new year.
Regardless of which month the petition is filed, divorce carries a high emotional and financial cost – even more so if it is acrimonious. One dreads to think how much Jolie and Pitt's legal advisors have earned in fees since 2016. So, when a couple friends of mine in their 50s playfully announced at the bar that they were considering a divorce for financial reasons, I was astonished. .
To keep their identities secret, and in the spirit of the movies, I'll call them Mr. and Mrs. Smith. Mark is the breadwinner, earning a good salary with a pension of over £1m. Meanwhile, Kirsty has only crumbs in her pension after giving up her career in finance to raise her two children.
The Chancellor's surprise move on Budget Day to cash out pensions Subject to inheritance tax It makes it powerless as a posthumous tax planning tool for wealthy families. In the future, spending the money or giving your children an early inheritance will be more tax efficient.
However, any pension withdrawal beyond the tax-free lump sum (usually 25 per cent) will attract income tax, disadvantaged couples like the Smiths who have one pension between two. Hence their crazy plan to divorce and use a pension sharing order to split the pot between them, allowing Kirsty to make withdrawals at a much lower tax rate.
Mark said that if their second seaside home became Christie's headquarters, they could also evade the newly imposed 200 per cent council tax on it. Once he retired, he sold his works in London; The couple will get back together, live by the sea and remarry to get the inheritance tax benefits between the spouses. So what do I think of their plan?
Ignoring the questionable ethics, I wondered whether the disruption and legal costs justified the saving. When Kirsty announces that she will only move forward if she can spend a lot of money on a big second wedding and a lavish honeymoon, their fantasy tax-evasion plan is truly foiled.
But our general conversation highlights just how important your marital status is in the world of financial planning. Instead of getting divorced for financial reasons, it would make more sense for millions of cohabiting British couples For marriage.
Proposed pension and IHT changes Making marriage and civil partnerships more attractive, as assets can be transferred tax-free between spouses on the first death. This avoids life-altering tax bills if one of you dies.
As tax breaks shrink, it becomes increasingly important for spouses or civil partners to maximize both their investment allowances and interest allowances on savings, dividends and capital gains tax, says Lisa Kaplan, a chartered financial planner at Charles Stanley.
If Mark were paying £20,000 a year into Kirsty shares and Isa shares, for example, this would give the Smiths greater tax efficiency flexibility in terms of future retirement spending.
post budget, Gifting money It is becoming a more important feature of tax planning. However, even if their marriage is solid, wealthy couples who give large gifts often worry about their adult children. Advisors report increased interest in the use of trusts to protect gifts in the event of adult children divorcing, as well as the use of trust funds Coexistence agreements If the partner moves in, this prevents them from making any future claim on the property.
Prenuptial agreements may not sound romantic, but they are become more common. This allows couples to decide what's mine (and yours) before marriage in the event of a subsequent separation. Law Committee It was just recommended Once again it should become legally binding.
It's not just Mom and Dad's bank insisting on this; The trend toward marriage later in life means that more couples will have independently built assets that they want to preserve. Lawyers have told me that prenup is more common in second marriages; Spouses often want to ensure that a share of their assets is passed to their children.
Naturally, all of these relationship insurance policies have significant legal costs. However, if I were a law firm writing a January divorce press release, I would assert that it may be minimal compared to the value of the assets at risk.
Claire Barrett is consumer editor at the Financial Times and author of “What they don't teach you about money'. claer.barrett@ft.com Instagram @clairb
