The biggest tax?

Tax is an emotive subject for people and no tax is more emotive than Inheritance Tax.  The thinking goes that if one has paid tax on income, on profits and on capital gains throughout one’s life it seems to be unfair that the resultant wealth is taxed again upon death.

Notwithstanding that the plethora of reliefs and allowances means that the vast majority of estates do not suffer tax, which is reflected in the comparatively low contribution of Inheritance Tax to the total income of His Majesty’s Treasury, it is quite understandable from the tone of media coverage that even people who are never going to have to worry about Inheritance Tax are led to believe that it is something about which they should be furious.

There is another cost which is often perceived as a tax by many people, which is not only imposed on a far greater number of people than Inheritance Tax but often is a significantly higher percentage.  That tax, if so it should be called, is the cost of divorce.

The financial cost of divorce is twofold.  The first is the most obvious, being the transfer of wealth away to a partner or in any event the division of wealth.  Divorce often demonstrates that in terms of wealth the whole is far greater than the sum of its parts.  A couple may feel very satisfied in the million pound house that they can afford together but if they cannot afford this separately then upon divorce they will each likely find themselves in significantly reduced circumstances.  The second financial cost of course concerns the legal fees.  Like any form of litigation divorce is horrifically expensive and, frankly, the only winners are the lawyers.  Note I have only referred to the financial cost of divorce and one should also consider that the other costs, particularly the emotional, are usually far greater.

According to the Office of National Statistics, in the year 2019-2020 there were 103,592 divorces.  According to government statistics in that same year or thereabouts, 23,000 estates were subject to Inheritance Tax.  While of course it is appreciated that many divorces will be of couples with more modest means, it still demonstrates that more people get divorced than estates have to bear Inheritance Tax.  Arguably therefore planning for divorce should be as much a factor in tax and estate planning as is Inheritance Tax planning.

The first thing to consider with planning for divorce is not to leave the planning too late.  Should one find oneself in the midst of divorce proceedings, or even in the midst of a separation, then suddenly gifting large amounts of wealth away or transferring it into other people’s names is likely to be considered transactions to be set aside by the court upon application by the other spouse.

There is definitely scope for nuptial planning.  Prenuptial agreements can have force if conducted properly and a competent divorce solicitor can give you advice on this.  They are less powerful however than post-nuptial agreements although it is accepted that many couples after they have married would find it rather difficult to discuss putting in place legal documentation dictating what would happen if they got divorced.

Planning ahead is much easier if being conducted by a preceding generation.  If you have concerns about the possibility of your children getting divorced then there is significant scope for planning, either by using trusts or family companies with different categories of shares and appropriate shareholder agreements.  More tools are available further down the line, however prior planning might be helpful not only for saving your children the burden of an Inheritance Tax bill but also potentially insulating them against the consequences of a failed relationship.

• James Hall – Managing Partner