I am getting divorced. I gave up work to take care of our children. My husband will not agree to share any of his pension, and instead is proposing I should take a larger share of the equity in the family home in lieu of a claim over half of his defined benefit scheme pension. The cash equivalent value of his pension is £680,000, and he is proposing I should take a discounted sum in lieu of around £250,000 from the proceeds of the family home in addition to my half share. Should I agree to this?
Peter Burgess, partner at Burgess Mee Family Law firm, says since 1999, the court has had the power to make pension sharing orders on divorce. This means that it is possible for the court to divide a UK-based pension scheme so that a percentage is transferred on a particular date to another qualifying scheme.
What you describe above is a common solution to a particular set of facts. The court’s priority will always be to ensure that the children can be rehoused, with reference to the available assets such as property and pensions.
With a traditional division of labour, where one party works and the other has childcare responsibility, one party may well have a mortgage capacity. This means that they will require less of the real estate and liquid capital to get back on the property ladder after the divorce. The court may well compensate this party for receiving less of the ‘liquid’ capital (property, cash, savings and investments) by allowing them to retain more of their pensions, a practice known as ‘offsetting’.
This is an area of specialist expertise because the valuation of pensions is a potential minefield. Comparing money in property or investments against money in pensions may not be comparing like with like.
In 2019, the Pension Advisory Group, a group of family justice and finance professionals, produced guidance about the application of the court’s powers in this regard. They recommended the instruction of a Pensions on Divorce Expert (Pode), an actuary or adviser, to produce a report on the appropriate division, especially where, as in your case, a defined benefit scheme is involved.
The cash equivalent value given by your husband’s pension scheme may well be at significant undervalue of the income stream that will be paid on retirement. A Pode will be able to evaluate what the fair value of the pension is — which is usually assessed by considering what the equivalent income stream would cost to obtain in the marketplace — and identify what percentage of the scheme would be an appropriate offset.
It is not, therefore, possible for me to answer your question conclusively but I hope this has been helpful. A half share of the cash equivalent value of your husband’s pension is £340,000, so accepting £250,000 from the house in lieu may well be a significant undervalue of your actual interest in both assets. However, without knowing more of the facts of your case, including your housing needs and your husband’s mortgage capacity and income, it is hard to be more specific than that.
My wife and I are UK nationals but I was forced to retire early from my job so we decided to sample living abroad. We left the UK in 2001 and retired to Andorra, not for financial reasons, but because we liked it there. We have built up a private residential letting portfolio of 10 modest properties in the UK, purchased at various times while we were in Andorra. We are considering returning to the UK, so should we put these rental properties into some kind of family trust? It would be with a view to passing them on to our children and/or grandchildren.
Mara Monte, a private client partner at Withers, says there are steps you can take to manage the succession of your property portfolio, but the wrong decisions could land you with a substantial tax bill.
Creating a trust for the UK properties would give rise to significant inheritance tax (IHT) charges. On transferring the properties into trust, there would be an initial entry charge of 20 per cent on the current market value of the properties. Although any gains in the value of the properties can be held over so that no capital gains tax (CGT) would be charged, the entry charge would be substantial.
There would also be ongoing tax charges, specifically the 6 per cent IHT charge every 10 years, based on the market value of all the properties held in the trust. In addition, there would be an IHT charge up to 6 per cent as and when the assets leave the trust and are transferred to the beneficiaries.
Furthermore, if you and your wife wanted to retain a benefit in the trust, ‘gift with reservation of benefit’ rules would apply to the effect that a further 40 per cent IHT would be charged on your death and, depending on the terms of the trust, it may not be possible to claim a spousal tax exemption.
Unfortunately, holding the properties via a non-UK entity (such as an offshore company) would not help either. The shares in the foreign entity would be regarded as UK assets because their value is attributed to the UK residential properties.
The most effective way to reduce the risk of IHT on death would be to gift the properties now. As long as the gifts are genuine (you no longer receive any benefit from the properties, such as rental income) and you survive the gift by seven years, the properties would not be subject to IHT on your death. From three years after the gift a tapering relief would apply to reduce the rate of IHT. Depending on your health and age, you may be able to take out IHT term insurance to cover the risk of death within seven years of the gift.
The gifts would be subject to CGT, with the gain being calculated using the deemed market value of the property at the date of the gift. As you would not realise any proceeds from the gift, this would be a ‘dry’ tax charge and you would need to have sufficient liquidity from other assets to pay the tax liability. If you gift the properties before resuming UK tax residence, the properties could be rebased to their April 2015 values so that only gains (if any) accrued between April 2015 and the date of the gift would be subject to tax. Once you resume UK tax residence, this rebase option is lost.
Practically, making gifts may not be the best option if you require the income from the properties or if the recipients are not yet at a suitable age to receive the properties. However, thought could be given to gifting the properties in a staggered approach.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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