3 unexpected ways divorce may affect your inheritance plans, and what you can do about it
If you are getting divorced or have already been through it, your inheritance plans may need to change. Here are 3 unexpected ways this could happen.
When you go through a divorce, everything can feel urgent. Sorting out your finances, achieving a fair settlement, worrying about your children’s wellbeing, and navigating your own emotions are all pressing needs that can’t be ignored.
With these factors on your mind, it is entirely understandable that you may not have thought about your long-term future – in particular, estate planning – at all.
Whether you are divorcing in your 30s or your 80s (or somewhere in-between), your estate plan may be affected by the decisions you make today. What’s more, with many estate planning rules designed to benefit married couples or those in civil partnerships, you could find yourself at a disadvantage if you are passing down wealth as a single person.
On the other hand, there may be positives to forming an estate plan as a single person that you haven’t considered yet.
Continue reading to discover three important ways that divorce could affect your inheritance plans.
- You may have less to pass down
Once you are through your divorce and have begun your life anew, you may find that your income, savings, and investments have all decreased somewhat.
2024 research from Legal & General reveals that women see their household income drop by 41% in the year following a divorce, and for men, this figure stands at 21% on average.
What’s more, your overall net worth may have dipped due to the splitting of pensions, property assets, and other key assets.
This means you’re likely approaching later life with less than you had originally thought.
Plus, contrary to popular belief, living as a single person doesn’t cost “half” of what it would cost to live as a couple. The latest Retirement Living Standards report says that the average comfortable retirement costs around £60,600 a year for a couple, and £43,900 for a single person.
All this said, it may be that the inheritance you plan to pass down after you die is smaller than you thought. However, this doesn’t indicate that the inheritance is less meaningful – there are still plenty of ways you can leave a nest egg for the next generation and make a big impact on their lives.
If you have to do more with less after getting divorced, it could be worth obtaining a bespoke review of your wealth. Independent advice may be especially useful if you are wanting to retire at a certain age or, if you are already retired, make your income last comfortably and pass wealth down to your children and grandchildren later.
- Your beneficiaries could pay more Inheritance Tax
As you might have read in our previous articles or elsewhere, Inheritance Tax (IHT) is levied on estates that are worth more than the government’s nil-rate band.
Since 2009, the nil-rate band has stood at £325,000. It is frozen until 2030.
Also frozen until 2030 is the residence nil-rate band of £175,000, an additional relief available for those passing their main residence (up to a certain amount) to their children or grandchildren. So, in total, an individual may be able to pass down up to £500,000 before IHT is due. IHT is usually charged at 40%.
Crucially, those who are married or in a civil partnership can inherit one another’s wealth tax-free. For example, if a wife passes away and leaves everything to her husband, he won’t pay IHT.
And, the surviving spouse or civil partner can claim their late partner’s unused nil-rate bands, bringing their beneficiaries’ potential tax-free inheritance to £1 million.
If you remain unmarried after a divorce, you won’t be able to benefit from this tax break.
That said, your children and grandchildren could still inherit £500,000 tax-free, if certain conditions are met, and if the rules remain unchanged. Plus, with bespoke advice, you could look into mitigating IHT through gifting and/or trusts.
So, although you may feel disappointed, there are tax efficiencies to take advantage of. If your situation changes again – for instance, if you remarry – you can revisit your plans and ensure your beneficiaries are taken care of no matter what.
Read more: Can you “bulletproof” your will to avoid inheritance disputes?
- You have full control over your estate plan
It is easy to dwell on the negative aspects of forming an inheritance plan after divorce.
Nevertheless, it’s important to also focus on the opportunities that lie ahead. Here, you have total control over how you bequeath your hard-earned wealth, and to who.
Forming an estate plan on your own means:
- Having full control over the financial gifts you hand to loved ones
- Being able to amend your will without having to consult anyone else
- Knowing you can make tax-efficient plans that work for your circumstances.
There are undeniably difficult parts of “going it alone”. But with the right support, you could form an inheritance plan that is appropriate for your family and proceed through later life with confidence.
Work with a Kellands financial planner
Our financial planners are here to offer tailored advice and help you leave a legacy.
Email us at hale@kelland.co.uk, or call 0161 929 8838.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or will writing.