Divorce
When our children get married, we all hope that it will be “Till death do us part” and that they will have a long and happy marriage.
Unfortunately, nearly half of all marriages (42%) end in divorce.
If your children’s marriages fail they can lose some, if not all, of their inheritance.
Most of us have worked hard for many years to create any wealth that we might have e.g. the family home plus, maybe, a business, investment properties, a holiday home, pension schemes, life insurances, investments and cash.
It would be a shame and totally unnecessary for any inheritance your children might receive from you to be put at risk through a failed marriage. With proper estate planning, you can protect your children’s inheritance for them.
Example - Son Loses Half of His Inheritance to Divorce
Beryl died, leaving her £500,000 estate to her only son, Clive, who was married to Hilary.
Clive’s marriage failed and the divorce settlement gave Hilary half of Clive’s assets – including half of this recent inheritance.
His original £500,000 inheritance was now reduced to £250,000.
If Beryl had followed proper estate planning protocol none of the estate she left to Clive would have disappeared in a divorce settlement.
Inheritance Tax
Various Chancellors of the Exchequer, e.g. Nigel Lawson, George Osborne, Roy Jenkins, have described Inheritance Tax as a “voluntary tax”.
You only have to pay this tax if you choose to do so or do not plan properly.
Unfortunately, very many people pay far more Inheritance Tax than they would if they had made proper plans.
Inheritance Tax was introduced in the Inheritance Tax Act 1984 at a rate of 40%. It has remained at this rate ever since. Prior to the Inheritance Tax Act 1984 we had other “death taxes” at considerably higher rates, including a rate of 85% in 1969.
This 40% Inheritance Tax is paid on the worldwide assets of UK individuals and on the UK assets of non-UK individuals, after allowances are made (the Nil Rate Band of £325,000 and, in some cases, the Residence Nil Rate Band of £175,000).
It is assessed on the transfer of assets, usually on the death of an individual. With certain exceptions it includes all the assets they owned at the date of death plus any assets given away up to seven years before the date of death.
It is also assessed on certain transfers made by an individual during his or her lifetime.
Inheritance Tax is assessed on transfers of an individual, not of a family or a couple. Whether the assets are kept within the family or passed outside the family makes no difference to whether or not Inheritance Tax is charged or to the amount of Inheritance Tax payable. There are, though, certain exceptions, perhaps the most important of which is that no tax is paid on a transfer to a spouse or civil partner.
Basic Inheritance Tax Calculations
Example 1 – Married Couple with £1.9 Million Estate
John and Mary have the following assets:
Home £500,000
Property Portfolio £900,000
Investments £400,000
Cash £50,000
Furniture & Sundry Possessions £50,000
Total Estate £1,900,000
Neither John nor Mary have gifted anything to anyone, other than “normal” gifting such as birthday and Christmas presents.
When John dies, Mary inherits everything. There is no Inheritance Tax due on transfers between spouses, so there is no Inheritance Tax on John’s death.
As John transferred everything to Mary he has not used his allowances (the Nil Rate Band and the Residence Nil Rate Band). Mary therefore inherits those allowances and can add them to her own to offset against the value of her estate on her death.
When Mary dies, assuming no change in values, the Inheritance Tax calculation is as follows:
Total Estate £1,900,000
Mary’s Nil Rate Band. £325,000
Mary’s Residence Nil Rate Band. £175,000
Nil Rate Band inherited from John. £325,000
Residence Nil Rate Band inherited from John £175,000
Total Allowances £1,000,000
Taxable Estate £900,000
Inheritance Tax @ 40% £360,000
Total Estate £1,900,000
Less Inheritance Tax £360,000
Net Estate after Tax £1,540,000
John and Mary’s children have to pay £360,000 Inheritance Tax before they can receive any of the net balance of £1,540,000 from their parents’ estate.
HMRC has to receive its £360,000 first, and the estate is frozen until this is paid.
Example 2 – Married Couple with £4 Million Estate
Brian and Anne have the following assets:
Home £1,000,000
Property Portfolio £1,600,000
Investments £1,250,000
Cash £75,000
Furniture & Sundry Possessions £75,000
Neither Brian nor Anne have gifted anything to anyone, other than “normal” gifting such as birthday and Christmas presents.
When Brian dies he passes everything on to Anne. There is no Inheritance Tax due on transfers between spouses, so there is no Inheritance Tax on Brian’s death.
As Brian transferred everything to Anne he has not used his Nil Rate Band allowance. Anne therefore inherits this allowance and can add it to her own to offset against the value of her estate on her death.
There are no Residence Nil Rate Band allowances, as neither of their estates were below the threshold for this at the time of death.
When Anne dies, assuming no change in values, the Inheritance Tax calculation is as follows:
Total Estate £4,000,000
Anne’s Nil Rate Band £325,000
Nil Rate Band inherited from Brian £325,000
Total Allowances £650,000
Taxable Estate £3,350,000
Inheritance Tax @ 40% £1,340,000
Total Estate £4,000,000
Less Inheritance Tax £1,340,000
Net Estate after Tax £2,660,000
Brian and Anne’s children have to pay £1,340,000 Inheritance Tax before they can receive any of the net balance of £2,660,000 from their parents’ estate. HMRC has to receive its £1,340,000 first, and the estate is frozen until this is paid.
Comparison of the two Examples
Even though Brian and Anne’s estate was £2,100,000 more than John and Mary’s, their children only received an additional £1,120,000. This is because more of the estate was taxable, due to the loss of the Residence Nil Rate Band.
With some straightforward planning, Brian and Anne could have retained the Residence Nil Rate Band and passed an additional £140,000 on to their children.
The use of a number of the strategies outlined in other sections of this site could not only have reduced the Inheritance Tax liability by £140,000 but could have removed the liability altogether:
-
saving John and Mary’s family £360,000
-
saving Brian and Anne’s family £1,340,000.
Inheritance Tax
Various Chancellors of the Exchequer, e.g. Nigel Lawson, George Osborne, Roy Jenkins, have described Inheritance Tax as a “voluntary tax”.
You only have to pay this tax if you choose to do so or do not plan properly.
Unfortunately, very many people pay far more Inheritance Tax than they would if they had made proper plans.
Inheritance Tax was introduced in the Inheritance Tax Act 1984 at a rate of 40%. It has remained at this rate ever since. Prior to the Inheritance Tax Act 1984 we had other “death taxes” at considerably higher rates, including a rate of 85% in 1969.
This 40% Inheritance Tax is paid on the worldwide assets of UK individuals and on the UK assets of non-UK individuals, after allowances are made (the Nil Rate Band of £325,000 and, in some cases, the Residence Nil Rate Band of £175,000).
It is assessed on the transfer of assets, usually on the death of an individual. With certain exceptions it includes all the assets they owned at the date of death plus any assets given away up to seven years before the date of death.
It is also assessed on certain transfers made by an individual during his or her lifetime.
Inheritance Tax is assessed on transfers of an individual, not of a family or a couple. Whether the assets are kept within the family or passed outside the family makes no difference to whether or not Inheritance Tax is charged or to the amount of Inheritance Tax payable. There are, though, certain exceptions, perhaps the most important of which is that no tax is paid on a transfer to a spouse or civil partner.
Basic Inheritance Tax Calculations
Example 1 – Married Couple with £1.9 Million Estate
John and Mary have the following assets:
Home £500,000
Property Portfolio £900,000
Investments £400,000
Cash £50,000
Furniture & Sundry Possessions £50,000
Total Estate £1,900,000
Neither John nor Mary have gifted anything to anyone, other than “normal” gifting such as birthday and Christmas presents.
When John dies, Mary inherits everything. There is no Inheritance Tax due on transfers between spouses, so there is no Inheritance Tax on John’s death.
As John transferred everything to Mary he has not used his allowances (the Nil Rate Band and the Residence Nil Rate Band). Mary therefore inherits those allowances and can add them to her own to offset against the value of her estate on her death.
When Mary dies, assuming no change in values, the Inheritance Tax calculation is as follows:
Total Estate £1,900,000
Mary’s Nil Rate Band. £325,000
Mary’s Residence Nil Rate Band. £175,000
Nil Rate Band inherited from John. £325,000
Residence Nil Rate Band inherited from John £175,000
Total Allowances £1,000,000
Taxable Estate £900,000
Inheritance Tax @ 40% £360,000
Total Estate £1,900,000
Less Inheritance Tax £360,000
Net Estate after Tax £1,540,000
John and Mary’s children have to pay £360,000 Inheritance Tax before they can receive any of the net balance of £1,540,000 from their parents’ estate.
HMRC has to receive its £360,000 first, and the estate is frozen until this is paid.
Example 2 – Married Couple with £4 Million Estate
Brian and Anne have the following assets:
Home £1,000,000
Property Portfolio £1,600,000
Investments £1,250,000
Cash £75,000
Furniture & Sundry Possessions £75,000
Neither Brian nor Anne have gifted anything to anyone, other than “normal” gifting such as birthday and Christmas presents.
When Brian dies he passes everything on to Anne. There is no Inheritance Tax due on transfers between spouses, so there is no Inheritance Tax on Brian’s death.
As Brian transferred everything to Anne he has not used his Nil Rate Band allowance. Anne therefore inherits this allowance and can add it to her own to offset against the value of her estate on her death.
There are no Residence Nil Rate Band allowances, as neither of their estates were below the threshold for this at the time of death.
When Anne dies, assuming no change in values, the Inheritance Tax calculation is as follows:
Total Estate £4,000,000
Anne’s Nil Rate Band £325,000
Nil Rate Band inherited from Brian £325,000
Total Allowances £650,000
Taxable Estate £3,350,000
Inheritance Tax @ 40% £1,340,000
Total Estate £4,000,000
Less Inheritance Tax £1,340,000
Net Estate after Tax £2,660,000
Brian and Anne’s children have to pay £1,340,000 Inheritance Tax before they can receive any of the net balance of £2,660,000 from their parents’ estate. HMRC has to receive its £1,340,000 first, and the estate is frozen until this is paid.
Comparison of the two Examples
Even though Brian and Anne’s estate was £2,100,000 more than John and Mary’s, their children only received an additional £1,120,000. This is because more of the estate was taxable, due to the loss of the Residence Nil Rate Band.
With some straightforward planning, Brian and Anne could have retained the Residence Nil Rate Band and passed an additional £140,000 on to their children.
The use of a number of the strategies outlined in other sections of this site could not only have reduced the Inheritance Tax liability by £140,000 but could have removed the liability altogether:
-
saving John and Mary’s family £360,000
-
saving Brian and Anne’s family £1,340,000.