Divorce can have a major impact on your financial arrangements, but one area that is often overlooked is inheritance tax.
While many people focus on the immediate practicalities of separating assets, updating living arrangements and making child-related decisions, it is equally important to understand how divorce can affect estate planning and future inheritance tax liability.
In this article, we explain how inheritance tax works, why divorce can change the position significantly, and why updating your will and wider affairs should be a priority if your relationship has broken down.
Prefer to listen? Play the full podcast episode below.
What Is Inheritance Tax?
Inheritance tax, often referred to as IHT, is a tax charged on a person’s estate when they die. In broad terms, it applies to the value of your assets above certain tax-free thresholds.
There are two basic rates to keep in mind:
- 0% on the portion of the estate covered by available allowances
- 40% on the value above those allowances
For many people, the starting point is the standard nil rate band of £325,000. In some cases, an additional residence nil rate band may apply where a home is being passed to direct descendants, such as children.
This means that, depending on your circumstances, the amount you can pass on free of inheritance tax may be significantly higher than the basic threshold alone.
How Inheritance Tax Works For Married Couples
For married couples and civil partners, the inheritance tax position is often much more favourable.
Transfers between spouses
Assets passing from one spouse or civil partner to the other are generally exempt from inheritance tax. That means there is usually no inheritance tax to pay on the first death where everything is left to the surviving spouse.
Transferable inheritance tax bands
In addition to the spousal exemption, unused inheritance tax allowances can often be transferred between spouses. This can make a substantial difference to the overall tax position of the family.
In many cases, a married couple with children and a property may be able to pass on up to £1 million free of inheritance tax once both have died.
How Does Divorce Affect Inheritance Tax?
Divorce changes this position considerably.
Once a couple is divorced, they lose the inheritance tax advantages that come with marriage or civil partnership.
In practical terms, this means:
- no spouse exemption for future transfers
- no transfer of unused inheritance tax bands between ex-spouses
- gifts between former spouses being treated like gifts to any other individual
This can reduce the amount that can be passed on free of inheritance tax and increase the risk of a future tax bill.
A Simple Example Of Inheritance Tax and Divorce
A straightforward example helps to show why this matters.
Imagine a married couple with children and a combined estate worth £900,000. While they remain married, they may be able to pass the whole estate down without inheritance tax, because of the spouse exemption and transferable allowances.
If they divorce, however, the position changes.
One former spouse may end up owning a property worth more than their own available tax-free allowances. If, for example, they die with an estate worth £650,000, but only £500,000 is protected by their available inheritance tax bands, the remaining £150,000 may be taxed at 40%.
That would create a tax bill of £60,000.
Depending on the estate, that could mean assets need to be sold to cover the liability.
Why Inheritance Tax Planning Matters After Divorce
This is one of the reasons divorce should always trigger a review of your estate planning.
Even where both former spouses intend to leave assets to the children, the loss of the transferable allowances can mean the tax position is very different from when they were married.
That is why inheritance tax and divorce should be considered together, rather than treated as entirely separate issues.
What Happens If One Former Spouse Remarries?
If a divorced person remarries, the inheritance tax position changes again.
As a newly married couple, they may once again benefit from:
- tax-free transfers between spouses
- transferable nil rate bands
- access to the residence nil rate band, including in some cases where provision is made for stepchildren
Remarriage can therefore create new estate-planning opportunities, but it can also make matters more complex, particularly when each spouse wants to protect assets for children from a previous relationship.
In these circumstances, careful will drafting is especially important.
What Happens To Your Will When You Divorce?
This is a crucial issue, and one that many people do not fully appreciate.
Once a divorce is finalised, references in your will to your former spouse are usually treated as though that person had died before you.
That may affect:
- gifts left to your former spouse
- appointments of your former spouse as executor
- other will provisions involving them
However, this only takes effect once the divorce is legally complete.
Why timing matters
If you die before the final order is made, your existing will may still operate exactly as written.
That means your spouse could still inherit under a will made before separation, even if the relationship has completely broken down.
That is why updating your will should be one of the first steps taken once separation becomes permanent, or divorce is clearly on the horizon.
How Soon Should You Make A New Will During Divorce?
As soon as possible.
If a relationship has ended and divorce is expected, it is wise to make a new will immediately rather than waiting for the formal legal process to conclude.
This helps ensure that your wishes are protected during the interim period and reduces the risk of unintended outcomes if something happens before the divorce is final.
You can read more about our will-writing services.
Why Updating Your Affairs Means More Than Just Making A Will
A new will is essential, but it is only one part of the picture.
When reviewing your affairs after separation or divorce, you should also consider:
Pension nominations and death in service benefits
These often sit outside the will. If nomination forms still name your former spouse, those benefits could still pass to them unless they are updated.
Jointly owned property
If property is owned as joint tenants, the surviving owner may inherit automatically regardless of what your will says.
To prevent this, it may be necessary to sever the joint tenancy so that each person owns a separate share as tenants in common. That allows your share to pass according to your will rather than automatically to your former spouse.
Guardianship and wider estate planning
If you have children, divorce should also prompt a review of guardianship provisions and the wider structure of your estate planning.
Final Thoughts
Inheritance tax and divorce are closely connected, even though they are not always considered together at the outset.
Divorce can remove valuable inheritance tax protections, alter what can be passed on tax-efficiently, and create serious risks if wills and related arrangements are not updated quickly.
If you are separating or going through a divorce, it is important to review your inheritance tax position, update your will without delay, and check related matters such as pension nominations and property ownership.
Taking advice early can help you avoid unintended consequences and make sure your estate planning still reflects your wishes after divorce.
This article is based on the Monan Gozzett Firm Talk podcast. Listen to the full episode here. This written version has been adapted from the audio and edited for clarity.
Please note that we are unable to offer free legal advice. Our client services team are here to take your case details and explain any costs involved
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Please note that we are unable to offer free legal advice. Our client services team are here to take your case details and explain any costs involved