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January is “divorce month,” according to the marketing departments of family law firms, which traditionally spin the story of Christmas misunderstandings between spouses that lead to New Year’s breakups.
Is that true? I received a press release from a law firm claiming that March actually marks the “divorce peak,” according to their analysis of 20 years of court data. Regardless, the announcement that Hollywood superstars Brad Pitt and Angelina Jolie have finalized their divorce after eight years of legal wrangling ensured the divorce was on every New Year’s bulletin.
No matter what month the petition is filed, divorce carries high emotional and financial costs—even more so if it’s acrimonious. One shudder to think how much legal counsel Jolie and Pitt have earned in fees since 2016. So when a 50-something couple I’m friends with playfully announced in a pub that they were considering a divorce for financial reasons, I was intrigued.
In order to preserve their anonymity and in the spirit of the films, I will call them Mr. and Mrs. Smith. Mark is the breadwinner, on a good salary with a pension worth over a million pounds. Meanwhile, Kirsty has only scraps left in her pension as she retired from a career in finance to raise their two children.
Chancellor’s surprise Budget Day move for pensions subject to inheritance tax renders them powerless as a posthumous tax planning tool for wealthy families. In the future, spending money or early inheritance to your children will be more tax efficient.
However, any pension withdrawals above the tax-free lump sum (usually 25 per cent) will attract income tax, putting couples like the Smiths who have one pension between two at a disadvantage. Hence their crazy plan to stage a divorce and use the pension splitting order to split the money between them, allowing Kirsty to withdraw the money at a much lower rate of tax.
Mark said that if their second home by the sea became Kirsty’s primary residence, they could also avoid the newly imposed 200 per cent council tax. When he retired, he would sell in London; the couple would reunite, live by the sea and remarry to take advantage of spousal inheritance tax relief. So what did I think of their plan?
Questionable ethics aside, I wondered if the upheaval and legal fees would justify the savings. When Kirsty declared that she would only go ahead if she could spend loads of money on a big second wedding and a lavish honeymoon, their tax-avoidance dream plan really went down the drain.
But our conversation in the pub illustrates just how crucial your marital status has become in the world of financial planning. Instead of divorcing over money, it would make more sense for the millions of British cohabiting couples marry.
Proposed changes to pensions and IHT make marriage and civil partnerships more attractive, as assets can be transferred tax-free between spouses after the first death. This avoids potentially life-changing tax bills if one of you dies.
As tax relief cuts, it becomes more important for spouses or civil partners to maximize their Isa and savings interest, dividend and capital gains tax allowances, says Lisa Caplan, chartered financial planner at Charles Stanley.
If Mark had paid £20,000 a year into Kirsty’s stocks and shares Isa, for example, this would have given the Smiths more tax-efficient flexibility with their future pension outlays.
post-budget, giving money has become a much more important feature of tax planning. Yet even if their own marriage is strong, wealthy couples who give large gifts are often worried about their grown children. Advisors report increased interest in and use of trusts to protect adult children’s divorce gifts cohabitation contracts if a partner moves in, preventing them from claiming the property in the future.
Prenuptial agreements may not sound romantic, but they also are becoming more common. This allows couples to decide what’s mine (and yours) before the wedding in the event of a split later. Legal commission just recommended — again — should become legally binding.
It’s not just mom and dad who insist on it; the trend of marrying later in life means that more couples will independently build assets that they will want to preserve. Lawyers tell me that prenups are even more common in second marriages; couples often want to ensure that some of their assets pass to their own children.
Of course, all of these relationship insurance policies come with significant legal fees. However, if I were a law firm writing a press release in January, divorce month, I’d point out that they might be miniscule 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
