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January is “divorce month”, according to the marketing departments of family law firms, which traditionally spin the line about spousal Christmas bust-ups leading to new year marriage breakdowns.
Is this true? I had a press release from a firm of solicitors claiming that actually it’s March that marks “peak divorce”, according to their analysis of 20 years’ worth of court data. Regardless, the announcement that Hollywood superstars Brad Pitt and Angelina Jolie had finalised their split after eight years of legal wrangling ensured divorce was all over the new year news bulletins.
No matter what month a petition is filed, divorce carries a high emotional and financial cost — even more so if it is acrimonious. One dreads to think what the Jolie and Pitt legal advisers have earned in fees since 2016. So when a 50-something couple that I’m friends with playfully announced in the pub that they were thinking of getting divorced for financial reasons, I was intrigued.
To preserve their anonymity and in the spirit of the movies, I’ll call them Mr and Mrs Smith. Mark is the breadwinner, on a good salary with a pension worth more than £1mn. Meanwhile, Kirsty has mere crumbs in her pension having stepped back from her career in finance to raise their two children.
The chancellor’s surprise Budget day move to make pensions subject to inheritance tax renders them impotent as a posthumous tax-planning tool for wealthy families. In future, spending the money or gifting your children an early inheritance will be more tax efficient.
However, any pension withdrawals beyond the tax-free lump sum (usually 25 per cent) will attract income tax, disadvantaging couples such as the Smiths who have one pension between two. Hence their madcap plan to stage a divorce and use a pension-sharing order to split the pot between them, allowing Kirsty to make withdrawals at a much lower tax rate.
Mark said if their second home by the sea became Kirsty’s primary residence, they could also dodge the newly imposed council tax of 200 per cent on it. Once retired, he would sell up in London; the couple would get back together, live by the sea and remarry to capture the inter-spousal inheritance tax benefits. So what did I think of their plan?
Ignoring the questionable ethics, I wondered if the upheaval and legal costs would justify the savings. When Kirsty declared she would only go ahead if she could spend loads of money on a big second wedding and lavish honeymoon, their fantasy tax-avoidance plan was truly scuppered.
But our pub conversation illustrates how crucial your marital status has become in the world of financial planning. Rather than get divorced for money reasons, it would make more sense for millions of cohabiting British couples to get married.
Proposed pensions and IHT changes make marriage and civil partnerships more attractive, as assets can be transferred tax-free between spouses upon the first death. This avoids potentially life-changing tax bills if one of you dies.
As tax allowances shrink, it becomes much more important for spouses or civil partners to maximise both of their Isas and allowances for interest on savings, dividends and capital gains tax, says Lisa Caplan, a chartered financial planner at Charles Stanley.
Had Mark been paying £20,000 a year into Kirsty’s stocks and shares Isa, for example, this would afford the Smiths more tax-efficient flexibility with their future retirement spending.
Post-Budget, gifting money has become a much more important feature of tax planning. Yet even if their own marriage is rock solid, wealthy couples making large gifts often fret about their adult children. Advisers report increased interest in the use of trusts to protect gifts in the event of adult children divorcing, as well as the use of cohabitation agreements if a partner moves in, preventing them from making any future claim on the property.
Prenuptial agreements may not sound romantic, but are also becoming more commonplace. These enable couples to set out what’s mine (and yours) before they wed in the event of a later split. The Law Commission has just recommended — again — they should become legally binding.
It’s not just the Bank of Mum and Dad insisting on these; the trend for getting married later in life means more couples will have independently built up assets they will want to preserve. Lawyers tell me pre-nups are even more common in second marriages; couples often want to ensure a share of their assets passes to their own children.
Of course, all these relationship insurance policies have significant legal costs attached. Still if I were a law firm writing a January divorce month press release, I’d stress they could be minuscule compared with the value of the assets at stake.
Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. claer.barrett@ft.com Instagram @Claerb
