Will the Proposed Change in Inheritance Tax affect divorce?

Resolution Foundation is calling for Inheritance Tax to be scrapped and replaced with a system that is harder to avoid and divide the money more fairly between the generations.

It seems that it would be possible to give up to £125,000 per person as a lifetime receipt of tax.

Inheritance has gradually crept in more and more to divorce cases. It cannot be relied upon unless pursuant to a Trust, or a testator no longer having capacity to change a Will but the Courts are certainly considering a situation where one person has significant inheritance prospects which could make a difference to future provision for them.

Would it help in divorce if either Husband or Wife could receive an immediate £125,000 from a parent or grandparent? It could certainly help divorce cases where money is very tight. It is often hard for both couples to have separate accommodation, particularly in expensive housing areas in London or the Home Counties. Even if there is very significant income during the marriage, it may very well have been used to support a lifestyle including school fees, rather than in the form of savings.

However, it is quite usual if there is significant family money for parents to help their offspring on divorce.

Where there is less money a parent might be willing to give a lifetime gift but one of the issues that may come up is what would happen to that if the recipient is involved in a subsequent divorce. The divorce itself will have made a family aware of this possibility and it is often the case the family members do not want the risk of what they see as their hard earned money will fall into the hands of a second spouse.

At the moment, under matrimonial law, there is no certainty, unless money is put in trust, of ensuring this.

If, say, the Husband receives a sum of money say £125,000 from his parents and uses it to buy a house. If he then re-marries and that house becomes the matrimonial home with his second Wife and, particularly if he has further children, on a subsequent divorce he may very well find that his second Wife has a claim to half of the equity in that house.

He can have a Pre-Nuptial Agreement and that does now have significant weight, but it does not bind the hands of the Court.

If the government want to encourage families to make lifetime gifts this would be considerably assisted in matrimonial law and provide some certainty of the recipient being able to retain this.

It is possible for money to be put in trust and depending on the terms of the trust the matrimonial Court may very well have to take into account that the monies are not accessible to either the Husband or the Wife in terms of Orders that can be made on divorce. However, trusts are expensive and have significant annual costs.

It depends therefore who this change in the Inheritance Tax law is being aimed at refers to encouraging family members to give money to their younger generation. However, from the broader spectrum of how this will work in practice it is hard to see that it will make a difference where there is significant wealth. In those cases there is usually very significant Inheritance Tax planning. If the intention that the think tank of the Resolution Foundation has said that the current system should be replaced with a fairer system that would be “harder to dodge” there would need to be far more significant changes than ??????? £125,000 lifetime gifts.  

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