Protecting inherited property on divorce

If you’re recently separated or contemplating separating from your spouse you may be  concerned about the division of marital assets, especially if you’ve inherited money or property during the course of the marriage, or are likely to do so prior to getting divorced.

Below we look at how any past legacy or future inheritance prospects are likely to be divided or factored in on divorce, and what steps you can take to protect your financial interests.

How will any inheritance be divided on divorce?

In England and Wales, any money or other assets inherited either before or during your marriage are not automatically excluded from the matrimonial financial pot. This means that any legacy will not automatically be ring-fenced and, as such, may have to be shared between you and your former spouse or civil partner on divorce or dissolution of the civil partnership.

That said, every case is different. Ultimately, therefore, whether or not you will have to share your inherited wealth on divorce depends on the specific circumstances of your case. The primary consideration will be the welfare of any dependent children, although other factors could include the size of the inheritance, when this was received, the manner in which the inheritance was dealt with during the marriage and the financial needs of both parties.

If any inheritance has been mingled in with matrimonial assets, for example, put towards the cost of the family home or to pay off the mortgage, you’re much more likely to have to share this with your ex than if this money or property has been kept entirely separate from the family’s finances. Your inherited wealth is also more likely to go into the joint ‘pot’ where the financial needs of one or both parties cannot be met from the matrimonial assets alone.

Will any future inheritance be taken into account?

With regard to any future inheritance, this will not usually be taken into consideration when the financial aspects of divorce are dealt with by the court. This is because a potential legacy cannot usually be determined with any degree of certainty, where a testator could easily change their mind. It can also be difficult to gauge the life expectancy of any testator.

That said, albeit exceptionally, where there is an expectation of a significant inheritance after separation and a divorcing spouse is likely to receive that inheritance imminently, the court may adjourn part of a financial application on divorce until the inheritance is received.

How can any inheritance be protected on divorce?

If you wish to protect inherited wealth in the event of divorce, you should consider entering into a pre- or even post-nuptial agreement with your spouse or civil partner. This does not automatically protect any legacy if you later separate and subsequently divorce, but if entered into freely and fairly by both parties it may be taken into account by the court.

In many cases, however, protecting any inheritance is not something that a couple will seriously contemplate, not until the relationship begins to breakdown and divorce seems likely. Still, in these circumstances, agreement can still be reached as to who gets what without leaving it for the courts to decide. By seeking expert legal advice from a divorce specialist at the earliest possible opportunity, this can help you to navigate this often fraught and stressful process, and to help negotiate a settlement to safeguard your financial future.  

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its’ accuracy, and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should always be sought.

How to deal with the debt of someone who has died

Being responsible for administering the estate of a loved one after they’ve died is no easy task, and not without risk, not least if they’ve left debts behind. It’s a common misconception that unpaid debts will be automatically written off on a person’s death, but this is simply not the case. As such, as either an executor or personal representative of the deceased’s estate, discharging any outstanding debt will form an important part of your responsibilities.  

Am I personally liable for the debt of a loved one?

In the UK, debt isn’t inherited, which means that family or friends will not be liable for the individual debts of the deceased. This means that when a loved one dies with an outstanding loan, credit card or any other debts, provided these were in the deceased’s sole name they will not pass to you or anyone else, not unless you or any other individual provided a guarantee. 

However, even if you’re not directly responsible for repayment of the debt, for example, as either a joint account holder or guarantor, an outstanding balance will still need to be paid from the deceased’s estate prior to any assets being distributed amongst the beneficiaries. 

How do I know what debts are owed by the deceased? 

Part of acting as an executor or personal representative is taking reasonable steps to establish what debts might be owing and if there is enough value in the estate to discharge these. There are various different ways of doing this, although checking the deceased’s paperwork and bank statements, both manually and online, is usually the best place to start.

Needless to say, it’s possible that some debts may go undetected during a search of the deceased’s financial affairs, where paperwork or records have been lost, destroyed or deleted, especially if a debt dates back several years. It’s also not uncommon for unidentified creditors to surface at a later date, after an estate has already been distributed, where you could be held personally liable and be required to repay the debt out of your own pocket. 

To ensure that you’re protected from any liability, you can place an advertisement in the London Gazette and local newspapers requesting unknown creditors to come forward —known as a “Deceased Estates Notice”, this will demonstrate that sufficient steps have been taken to locate creditors prior to distribution of the estate. You’re not under any legal obligation to place a notice, but if you fail to do so you could put yourself at serious risk.

In what order do any debts need to be discharged?

In some cases, having determined the total value of the deceased’s estate, there may not be sufficient funds to pay off any outstanding debt. If the deceased had more debts than assets, their estate will be classed as insolvent. This means the beneficiaries won’t receive anything, where all assets must instead be used to clear the outstanding liabilities.

In these circumstances, executors and personal representatives will need to discharge each debt in a particular order. This is known as the order of priority, where any failure to follow this order correctly could again result in you becoming personally liable to the creditors. The order of priority means that secured debts such as a mortgage must be paid prior to even funeral expenses and costs relating to the administration of the estate.

Given the risk involved of dealing with an insolvent estate, you may want to consider renouncing your role and responsibilities as an executor, although ideally this should be done before you have become actively involved in dealing with the deceased’s affairs.

Should I seek legal advice when dealing with a deceased’s estate?

Given the potential consequences of failing to identify all outstanding creditors or incorrectly administering an insolvent estate, it's often best to seek expert advice from a probate specialist as soon as possible. In this way you can explore the options available to you and what steps to take to protect yourself from any personal liability.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its’ accuracy, and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should always be sought.

Inheritance tax and the 7 year rule

One of the most effective ways in which you can reduce the amount of tax to be paid by your estate after you die is by giving away cash or assets during your own lifetime. The effect of such gifts can be to remove their value from your estate, thereby reducing the amount of inheritance tax due after death. Below we look at which lifetime gifts are automatically exempt from IHT and how potentially exempt transfers, or PETs, work under the 7 year rule.

What lifetime gifts are automatically exempt from IHT?

Gifts as between spouses or civil partners are usually made tax-free, regardless of the circumstances or timescales involved. There are also other lifetime gifts that will not count toward the value of your estate because they are automatically exempt. These include:

•   The annual exemption: here you can gift up to £3,000 each tax year

•   Small gift exemption: an unlimited number of small gifts can be made of up to £250 per person, provided no other gifts were made by you to these recipients

•   Wedding or civil ceremony gifts: these gifts are subject to limits depending on the relationship between you and the recipient, and can range from £1,000 to £5,000

•   Living costs: you can make payments from your surplus income to help with the living costs of a child aged under 18 or an elderly relative.

What are potentially exempt transfers and the 7 year rule?

A potentially exempt transfer (PET) is a gift that is not automatically exempt, but for which no inheritance tax will be payable if sufficient time has passed since the making of the gift and the date of death. A PET will only become chargeable to IHT where you fail to survive for 7 years from the making of the gift. Under the 7 year rule, if a gift is made more than 7 years prior to the date of death, regardless of the nature or size of the gift, no inheritance tax will be payable.

However, even for gifts that fall within 7 years of death, some tax relief may still be available in the form of taper relief if your estate is chargeable to inheritance tax. Taper relief applies if the total value of any gifts made within the 7-year period prior to death exceeds the inheritance tax-free threshold of £325,000 (2020-2021).

Under the taper relief rules, inheritance tax is payable on a sliding scale, from the full 40% IHT rate for gifts made less than 3 years ago, down to just 8% for gifts made within 6-7 years of death. As such, lifetime gifts, even in respect of those made within a few short years prior to the donor’s death, can have a significant impact on the amount of tax payable after you die.

To understand more about how lifetime gifts can be used to minimise the tax payable on your estate on death, together with other mechanisms that can be used to reduce any liability to IHT, professional advice should be sought from an Estate Planning and Wills expert.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its’ accuracy, and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should always be sought.