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Divorced tax savers stung for millions

Did you know your tax planning now could affect your settlement if you get divorced? If not, the reality may shock you.
December 3, 2012

Commonly used tax dodging tactics are forcing thousands of wealthy divorcees to give up millions from their estates, as a record number of older couples are throwing in the towel on their marriages.

No-one says "I do" expecting to get divorced one day, but the reality is between 30-40 per cent of marriages currently end this way. And in the three year period before 2010 (when the latest data was gathered by the Office of National Statistics) the number of couples aged 60 and over to be granted a divorce climbed more than 25 per cent to 14,600.

But despite a growing trend in the breakdown of older couples' marriages, many of whom have been together for over 40 years and accumulated considerable wealth, a host of financial planners are refusing to address the fact their tax-reduction advice could be detrimental to the increasing number of people who are finding themselves in this position.

Tightening wealth laws mean personal assets such as inheritance, property or share portfolios acquired before a marriage (called non-marital assets) are becoming more difficult for spouses to seize in a divorce settlement, which will come as reassuring news for married individuals with significant personal wealth.

But individuals, who have tactically shared their assets with a spouse as part of a tax reduction exercise, have unwittingly removed the ring-fence that would have protected those assets from having to be shared in the event of a divorce.

As the vast majority of couples who pay higher-rate tax or have significant wealth divide assets in this way in order to dodge tax, it means they will not be able to benefit from the stricter divorce laws.

For example, a higher-rate tax paying man could transfer a share portfolio he acquired before he got married to his lower-earning wife, so they only pay basic-rate tax, which would reducing their joint tax bill. But if he later divorced her, the share portfolio (which would have previously counted as a non-marital asset and therefore would not have to be shared) would now be counted as a joint marital asset which would be split appropriately in the divorce settlement.

Catherine Hallam, head of private client services at Burges Salmon, says if you want to protect your non-marital assets in the event of a possible divorce, you should think twice before gifting them to your partner for tax reasons. Note that married couples who have put in place a pre-nuptial agreement may be treated differently.

Having dealt with a surge in legal battles over inheritances gifted to spouses to cut tax bills - mainly involving the breakups of second marriages that occur later in life - she told the Investors Chronicle: "Tax planning is not a defence in court if you want your assets back once you’ve given them to your partner, and judges are only getting stricter about what counts as marital and non martial assets."

Mrs. Hallam condemns financial planners for not addressing the issue, but Gerry Brown, technical manager at Prudential, has an entirely different view on the touchy issue. He says people shouldn't be tax planning with the mindset they might get divorced.

"You should focus on the tax you can save now rather than worrying about something that might never happen. And the vast majority of couples will stay together until one of them dies, so it's better to focus on how much money they could be saving through reducing their tax bill now," he says.

 

Marital and non-marital assets

Marital assets are normally divided equally on divorce. They are assets and pensions which have been built up during a marriage. The law does not make a distinction between the efforts of the breadwinner and the homemaker, so assets accumulated from one party's business or employment will fall into this category.

Non-marital assets are defined as assets acquired by family gift or inheritance, or owned by one party prior to the marriage.

Where an equal division of marital assets leaves each party with enough to meet their needs, non-marital assets will not be divided equally but will be left with the party who owns them.