The think tank’s proposed tax reform might clash with the uncertainty around matrimonial law and finance, writes Marilyn Bell
Resolution Foundation is calling for inheritance tax to be scrapped and replaced with a system that is harder to avoid and divides the money more fairly between the generations.
Proposals consider being able to gift up to £125,000 per person as a lifetime gift without payment of tax.
Inheritance has gradually crept into more and more to divorce cases. It cannot be relied upon unless there is certainty of inheritance (eg a pursuant to a trust) or a testator no longer having capacity to change a will; but the courts are certainly now considering situations where one person has significant inheritance prospects which could make a difference to future provision for them.
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Would it help in divorce if either husband or wife could receive an immediate £125,000 from a parent or grandparent? It could certainly help divorce cases where money is very tight. It is often hard for both couples to have separate accommodation, particularly in expensive housing areas in London or the Home Counties. Even if there is very significant income during the marriage, it may very well have been used to support a lifestyle including school fees, rather than be in the form of savings.
Where there is significant family money it is already more usual for parents to help their offspring on divorce and this is less likely to be affected.
Where there is less money a parent might be willing to give a lifetime gift but one of the issues that may come up is what would happen to that money if the recipient is involved in a subsequent divorce. The current divorce itself will have made the family aware of this possibility and it is often the case the family members do not want the risk of what they see as their hard-earned money possibly falling into the hands of a second spouse.
At the moment under matrimonial law, there is no certainty of ensuring this, unless money is put in a trust.
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If, say, the husband receives a sum of money of £125,000 from his parents and uses it to buy a house. If he then re-marries and that house becomes the matrimonial home with his second wife and, particularly if he has further children, on a subsequent divorce he may very well find that his second wife has a claim to half of the equity in that house.
He can have a pre-nuptial agreement (which now does have significant weight), but it does not bind the hands of the court, particularly if there is financial need for the gifted money to be taken into consideration.
If the government wants to encourage families to make lifetime gifts this would be considerably assisted if matrimonial law provided some certainty of the recipient being able to retain this.
It is possible for money to be put in a trust and depending on the terms of the trust the matrimonial court may very well have to take into account that the monies are not accessible to either the husband or the wife in terms of orders that can be made on divorce. However, trusts are expensive and have significant annual costs, and may not be appropriate where there is less money in a divorce.
It depends therefore on who this change in the Inheritance Tax law is being aimed at. It refers to encouraging family members to give money to their younger generation. However, in practice, it is hard to see that it will make a difference where there is significant wealth, as in these cases there is usually very significant tax planning.
If the intention of the think tank of the Resolution Foundation is that the current system should be replaced with a fairer system that would be ‘harder to dodge’, there would need to be far more significant changes than a number of £125,000 lifetime gifts.
Marilyn Bell is head of the Family Law team and partner at SA Law
