Protecting your interests following divorce and remarriage
In 2001, there were 2.5 million divorced adults in the UK; today this figure is 4.4million*. Whilst we can attribute the higher rate of 2021 and 2022 to a backlog of those that would have occurred in 2020 due to the COVID-19 pandemic, it is still a clear trajectory. Although there isn’t a single clear reason why, we can look towards rising life expectancy, globalization and increased equality, which have all played a part in these statistics.
From a financial planning viewpoint, these trends add multiple layers of complexity to people’s personal finances, and it’s something that has a huge impact on tax planning, both in life and when looking to pass down your wealth to your desired loved ones.
What happens to my will when I remarry?
The first aspect of any modern family complexity is a will. Quite simply, your will becomes null and void when you remarry. Naturally, upon divorce and remarriage one would expect that your desired wishes will change, however there is an alarming number of people who neglect rewriting their will after such a life event. Alarmingly, in an Legal & General study in 2021, they found that 53% of UK adults did not have any will at all. This can often mean that people who had previously been beneficiaries are no longer in line to inherit anything after the person passes away.*
Passing down wealth to loved ones after divorce
It is crucial to remember that your will does remain valid after a divorce, but your ex-spouse will no longer be able to benefit from it as they will be treated as if they had died when the marriage/civil partnership dissolved.
In theory, you do not have to do anything to your existing will following a divorce as anything that would have been passed to your ex-spouse will be passed to your other named beneficiary. But what happens if you do not have any other beneficiaries? Under these circumstances, your estate will be handled as if you did not have a will in place at all, which is known as dying intestate. This means that the law will decide what happens to your assets and money.
Trusts can also be used to offer flexibility and control in managing assets and controlling distribution. This can be an alternative legal structure that can ensure different assets can be allocated to the correct individuals and at what time. Trusts have been long-standing strategies to help structure family affairs and continue to be a good route for many of our clients. You can consult a financial adviser about the most suitable structure for your circumstances, of which a solicitor would also need to be involved in the process.
The benefits of marriage/civil partnership from a tax perspective
In 2023, there is also a trend to refrain from marriage altogether. The proportion of adults in the UK who have never been married stands at 4/10, or 18.4 million people; this is 6 million more than twenty years ago*. Nevertheless, it’s important to be clear on the tax advantages of being in a marriage/civil partnership from a tax perspective:
If you are married, anything you leave to your partner on death passes through to them free of any tax, whereas bequests to non-spouses attract IHT of 40% of any assets above the value of £325,000.
If your spouse passes away, you can also obtain their unused nil-rate band (NRB) allowing you to pass on assets up to £650,000 (2 x £325,000) to your beneficiaries.
You can also benefit from a Residence Nil Rate Band (RNRB) whereby you have a further £175,000 each allowance, provided you pass on your main residence to a direct descendant. However, this is provided your total estate has a net value of less than £2 million (after deducting liabilities). It is tapered at a rate of £1 for every £2 over this £2million threshold. For example, if your total estate has a net value of £2,200,000, the residence nil rate band would reduce from £175,000 to £75,000. For net estates over £2,350,000 for individuals or £2,700,000 for married couples, the full residence nil rate band would be £nil.
Both spouses have their own CGT exemption, which is currently £6,000 in the tax year 2023/24. With careful planning, asset ownership can be transferred so that effectively you can optimise £12,000 (2 x £6,000) of capital gains per annum before attractive tax.
Note, usually a transfer of asset ownership can trigger a CGT liability, however this doesn’t apply between spouses.
It’s important to be aware that from the tax year of 2024/25, the CGT annual allowance will reduce further to £3,000.
When one spouse/ civil partner has insufficient income to fully utilise their tax-free personal allowance (currently £12,570), they can elect to transfer £1,260 of their allowance to their spouse, offering a saving of £252 per tax year. This is subject to certain conditions, such as the receiver being a basic rate taxpayer.
ISA Additional Permitted Subscription (APS)
Following the death of a spouse/civil partner, the APS allows a widow(er) to continue to benefit from tax-free income/growth on an amount equal to the value of the ISA of the deceased at the time of their death.
Crucially, you must also be living together at the time of death. This is often unlikely to be the case for those going through a divorce and may mean it is not eligible if one were to die during this process.
What about my pensions?
Pension planning naturally forms a big part of the work that we do for our clients. For those individuals who hold final salary (defined benefit) pensions, the surviving spouse typically receives a spousal benefit on the passing of their spouse/ civil partner (subject to scheme rules/conditions). An unmarried couple would not be able to benefit from this.
Regarding money purchase (defined contribution) pensions, these provide much more flexibility and simply require an ‘expression of wish’ form so that you can nominate a beneficiary to receive the benefits in the event of death. This beneficiary can be anybody and can pass down through generations; it does not have to be a spouse. It’s worth noting, however, that this is only an expression of wish, it does not always ensure/guarantee that the person(s) named will receive the money.
Does this apply to me?
In theory, the points mentioned above are applicable to all adults in the UK, married or unmarried. However, the key point here is that those with convoluted family structures - whether that be divorce, remarriage, step-children or co-habitors - will have to be on top of their financial planning both now and in future in case of further changes. There are numerous steps you can be taking to make sure that you are, first and foremost, maximising your tax-efficiency whilst simultaneously ensuring your estate will be going to the loved ones that you wish.
If you’d like to learn more about how we can help, why not get in touch and speak to one of our experts for a free initial consultation.
* Source: BBC
This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.
The Financial Conduct Authority (FCA) does not regulate wills, estate planning, tax or trust advice.