The myth that you should always share property with your spouse in order to reduce the amount of tax payable, and make use of each spouse’s personal allowance, is not without justification.
This article is part of a series of articles that aim to debunk the top 10 myths and misconceptions around divorce and finances that we have come across with our clients.
Sharing property to minimise tax liability
When considering whether to share property the vast majority of accountants will sensibly suggest that capital assets (such as shares or investment properties) are shared with a spouse in order to minimise the tax liability, particularly on the associated income. For example, shares in a family business may be transferred to a spouse in order for the dividend income to be shared more widely, and reduce the amount of tax paid by each individual shareholder.
Risks to sharing property
There are risks to sharing, or “mingling”, property, however, and these risks relate in particular to assets which have been accrued prior to the marriage, or which have been gifted to, or inherited by, one spouse. Where assets acquired in such a way have been shared, the asset, which may once have been considered non-matrimonial property, and excluded from matrimonial calculations upon the breakdown of a marriage, may lose its non-matrimonial status completely. This would mean that the expectation is that the asset is shared with the non-inheriting spouse.
Mingling does not prevent you from arguing that you have made the greater contribution to the matrimonial finances, but the starting point has changed – by keeping the gifted or inherited asset in your sole name, the expectation is that the asset will be kept out of the matrimonial equation provided needs can be met from other resources. The Court’s first priority will always be the respective financial needs of the parties and so the Court may well decide to divide assets, even if they have been kept separate, where this is required in order to meet one party’s needs. Again, however, it will be for the non-inheriting spouse to show why they need a share of that asset, rather than for the inheriting spouse to show why it should not be shared.
Assets which have been gifted or inherited
From a matrimonial perspective, if possible, assets which have been gifted or inherited should be retained in separate names, unless you are comfortable with the asset being shared in the event of a divorce. There are undoubtedly financial benefits to capital assets being shared with your spouse, but it is important to weigh up those benefits against the risk of losing half of that capital in the event of your marriage breaking down. If you have any concerns at all, it is important to obtain legal advice at an early stage, as there are protections that can be put in place to minimise the risk, either before or after the asset has been shared but, importantly, before the marriage has broken down.
To see the full series of our Top 10 divorce finance myths, please click here.