Christopher Finch asks girlfriend to marry him for tax reasons

There can be many reasons to marry the person you love, but perhaps one of the less romantic is for tax purposes. This is legitimate financial advice for some couples, particularly those later in life who are considering inheritance tax (IHT) planning. It is, of course, a significant benefit that anything left to a spouse or civil partner on death is exempt from IHT, and that any unused nil-rate band can be transferred to the surviving spouse or civil partner, significantly bolstering tax-free allowances and helping to avoid a potentially sizeable IHT liability. Yet marriage also brings with it a host of legal rights and responsibilities that those marrying primarily for tax purposes may not have fully considered. This is particularly so where the marriage breaks down before any well-intentioned IHT planning can take effect. Later-life marriages, and second marriages in particular, can also raise difficult questions about what is, and crucially what is not, an asset of the marriage to be shared in the event of divorce.

A key concept in finances on divorce is the distinction between matrimonial and non-matrimonial property. Upon marriage, both parties acquire substantial financial claims against one another in the event of divorce. Contrary to what many assume, these claims are no different simply because a couple married later in life or for pragmatic rather than romantic reasons. On divorce, the court has broad discretionary powers and is guided by a range of factors. For later-life marriages, the court will pay close attention to the financial resources each party brings, the source of that wealth, the ages and health of the couple, the duration of the relationship – importantly, this will often include any period of prior cohabitation, meaning that a marriage that appears short on paper may be treated as part of a much longer relationship – and the standard of living the couple enjoyed together. A key concept in finances on divorce is the distinction between matrimonial and non-matrimonial property. Matrimonial property – broadly, wealth generated during the marriage – is ordinarily shared equally. Non-matrimonial property, such as assets acquired before the marriage or received by way of inheritance or gift, may be ring-fenced from division, but this is by no means guaranteed. Is it realistic to plan for divorce? Where needs cannot be met from matrimonial assets alone, the court may – and regularly does – invade non-matrimonial wealth. For couples who marry later in life, often bringing with them the accumulated assets of a lifetime, this distinction is of critical importance and one that is all too easily overlooked.

The concept of ‘needs’ sits at the heart of the court’s analysis. Even in a short- to medium-length marriage the court will seek to ensure that both parties can meet their reasonable housing needs and maintain a reasonable standard of living. In later-life cases, pension provision is often the most valuable and most fiercely contested asset. The court has wide powers to share pension benefits, and a divorcing spouse may acquire a significant claim against the other’s pension, even where that pension was built up entirely before the marriage. For clients who have spent decades building their retirement provision, this can be a deeply unwelcome revelation. None of this is to say that marrying for IHT purposes is bad advice and to be completely avoided. Like many things in family law, it is about context. In many cases, it remains an effective and entirely sensible planning tool. But it must be given with eyes wide open.

Recommend marriage where the tax advantages justify it, but make sure your client takes family law advice first. If marriage forms part of your client’s tax planning, it is essential that they are also advised on the legal consequences of that marriage, including the financial claims they may be exposed to should it break down. Early, joined-up advice between financial advisers and family law solicitors is essential. The couple should also be encouraged to consider a prenuptial agreement before the wedding, or a postnuptial agreement afterwards, to record their intentions and protect pre-acquired wealth as far as possible. Such agreements are not yet automatically binding in England and Wales, but they nevertheless can carry significant weight where freely entered into with the benefit of independent legal advice. The message for advisers is clear: by all means recommend marriage where the tax advantages justify it, but make sure your client takes family law advice first. Christopher Finch is a partner in the family team at HCR Law.