What happens to pre-marital wealth on divorce?
An important case was recently heard in the UK Supreme Court, which could impact the way in which pre-marital wealth and inter-marital transfers are dealt with on divorce.
The case, Standish v Standish, centres on whether a £77 million transfer from the husband to the wife during the marriage should be treated as a matrimonial asset. The transfer was intended to be settled into a trust for their children, but this was never executed.
The original decision in the High Court deemed the asset to be a matrimonial asset and awarded Mrs Standish £45 million, however, the Court of Appeal reduced this to £25 million on the basis it was primarily a pre-marital asset of Mr Standish.
The Supreme Court judgement came out on 2 July (upholding the Court of Appeal decision), and the implications for tax planning are significant, particularly for wealthy individuals and those involved in estate planning.
Some key points to consider
Inheritance Tax (IHT)
- Classification of assets: If the Supreme Court rules that certain inter-spouse transfers are not considered joint assets, it could affect how these assets are treated for inheritance tax purposes.
- Trusts and estate planning: The case highlights the importance of properly finalising estate planning strategies, such as setting up trusts. Trusts can be an effective way to manage and protect assets from inheritance tax, but they must be correctly established and documented.
- Documentation and intent: Proper documentation of the intent behind asset transfers is crucial. Clear records can help ensure that assets are classified correctly, which is essential for tax planning and minimising tax liabilities.
- Review of existing plans: Individuals may need to review their existing estate and tax plans, which could be impacted by the Supreme Court’s decision.
- Impact on wealthy individuals: Wealthy individuals might need to adopt more robust measures to protect their assets from tax liabilities, such as prenuptial agreements or more sophisticated estate planning techniques.
Capital Gains Tax (CGT)
- Asset transfers: The classification of assets as either matrimonial or non-matrimonial could impact capital gains tax liabilities and influence how gifts between spouses are treated for CGT purposes.
Income Tax
- Income from assets: The classification of assets can also affect how income generated from these assets is taxed.
- Tax planning strategies: Wealthy individuals might need to reassess their tax planning strategies to ensure that income from non-matrimonial assets is managed in the most tax-efficient manner.
The case underscores the need for careful tax planning, which we can assist with. By providing clearer guidelines on asset classification, the Supreme Court's decision could help individuals plan their estates and manage their tax liabilities more effectively.
For more information on the issues outlined or advice on your individual circumstances, please get in touch with your usual Crowe contact.
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