Using case studies, Charlotte Pollard and Sofia Thomas consider the range of tax and estate planning issues for clients remarrying or divorcing later in life, and flag the common pitfalls to avoid

A recent, bizarre case, Scarle v Scarle [2019] EWHC 2224 (Ch) sets the scene for this article.

Charlotte Pollard

Sofia Thomas

In 2016, Mr and Mrs Scarle were found dead in their bungalow. It became clear they had died of hypothermia at least 48 hours before they were found. They owned their property as joint tenants and a dispute arose between their respective daughters, each from a previous marriage, as to which of their parents had died first. Along with the property, £18,000 held in a joint bank account would also pass to those entitled under their respective estates.

Mr Scarle died without a will. Mrs Scarle’s will made no provision for her stepdaughter. Mr Scarle’s daughter argued that Mrs Scarle died first, which would result in her father inheriting their joint assets, which in turn would pass to her. Her stepsister argued that it could not be certain who passed away first, and therefore, being younger than her husband, her mother should legally inherit the property, under the commorientes rule within section 184 of the Law of Property Act 1925.

For those clients divorcing and remarrying later in life, careful consideration should be given to the potential complexities of estate planning. In this article, we consider our duty of care, as a solicitor and a tax adviser respectively, as to how we might assist clients with the complex, sometimes unintended, tax implications of failing to plan adequately. While much of this may seem obvious to us, it is not necessarily common knowledge for clients.

For clarity, where we refer to marriage and divorce, we include civil partnerships and the dissolution of a civil partnership.


Your main aim is to pre-empt and avoid family conflict arising.

  • Propose the appointment of independent executors / trustees, but make clear to the client that professional trustees will charge for their services.
  • Suggest the client writes a comprehensive letter of wishes, including reasons for their decisions. Although not legally binding, this gives guidance to their trustees. Ensure the client updates the letter when required.
  • Check the client is aware that marriage revokes an existing will and will have inevitable tax consequences.

Example 1

Martin and Elton are in their 60s. Although they have cohabited for many years and have a child, they decide to get married. Their mirror wills leave everything to one another, and they feel there is no need to amend them after their marriage: why incur the unnecessary expense? They are unaware of the unintended consequences of intestacy, particularly where there is a child involved. The marriage fails.

Tax considerations

Once the decree absolute is issued, everything that a testator has passed to their ex-spouse in their will passes as if the ex-spouse had died on the date that the marriage legally ended. Therefore, this previous legacy, which would have been tax-free (under the spouse exemption), may be liable to inheritance tax (IHT). The failed legacy passes to the next person entitled in the will, or in the absence of default beneficiaries, in accordance with the rules of intestacy.

IHT implications

Martin and Elton are now in their 70s, and divorcing. Prior to divorce, their mirror wills provided that after the first death, their assets pass to the surviving spouse and thereafter to their adult son, and failing that, to their grandchildren. Dependent upon any lifetime gifting within the last seven years, the wills ensure that, on the death of the second spouse, they benefit from a 100% increase in their combined nil-rate band (NRB) and residence nil-rate band (RNRB).

Once the decree absolute has been issued, anything that was to pass to Elton will pass as if Elton had died on the date the marriage legally ended and, instead, all assets will pass to their son. As there will be no uplift in the NRB or RNRB, exemptions of £475,000 (£325,000 NRB and £150,000 RNRB) have been wasted, potentially increasing the tax liability of Martin’s estate by £190,000.

Capital gains tax implications

When a couple marry, transfers between the couple are treated under the ‘no gain, no loss’ rule. This means there are no capital gains tax (CGT) implications on transfers between married couples. Once a couple separate irrevocably and cease to live together as a married couple, their CGT position changes. They are treated as ‘connected’ people for CGT purposes, which means that all transfers between them take place at deemed market value.

Transfers that occur between separation and the final divorce often result in tax implications for the person disposing of the asset.

Once the divorce is finalised, all transactions between the parties take place at arm’s length. It is important to consider if the transactions are truly arm’s length, because if they are connected to the divorce, the connected-person rules may continue to apply.

Second marriage - three linked wedding rings


Children and dependants

There may be children from previous relationships, possibly much older than any offspring from the second marriage, and with different financial circumstances and needs.

IHT implications

Ask the client if they have made any loans / gifts to their children (for example, to buy a house). What is the status of the gift / loan and how does this impact on the estate?

If the money is a gift, it follows the usual potentially exempt transfer (PET) rules (and here, a deed of gift may be sensible to confirm their intentions). If the money was a loan, then depending on how it was structured, it is likely to be immediately repayable on death. The recipients of the loan should be made aware of this; check if they can meet this obligation. If they are unable to meet the loan, they could consider insuring the potential liability at the time of the loan.

Also, bear in mind the following.

  • Have you advised the client on available reliefs, such as those under section 11 of the Inheritance Tax Act 1984 (IHTA 1984) (dispositions for maintenance of the family, or for the training and education of a child)?
  • Have you discussed the advantages (and disadvantages) of settling a sum into trust for children?

Assets owned prior to this relationship

There will almost certainly be assets (or perhaps a business) acquired prior to remarriage that one or both parties may wish to protect. The client may wish to consider passing the assets to their adult children from their previous marriage, and any income from the assets to their new spouse.

Tax implications

If assets (specifically properties) were passed to the client as the result of a financial order, it is important to understand if any tax reliefs were claimed to defer the potential capital gain. Divorcing couples can benefit from holdover relief for business assets and investment property relief. If a property has been transferred and certain reliefs claimed, this can impact on the ability to transfer the properties into a trust.

Claims for holdover relief under section 260 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) most commonly arise when transfers are made into and from trusts. Some lifetime gifts into trust are not PETs, and will result in an immediate IHT charge.

Example 2

Mr and Mrs Smith have an adult daughter, Paula. They have both used their NRB, having made gifts into trusts in the last few years. Now they wish to make a lifetime gift of their investment property into a discretionary trust for Paula.

IHT implications

In example 2, the gift into the trust will be a chargeable transfer for IHT, Mr and Mrs Smith will be able to elect to defer the gain. They bought the property for £100,000, and it has a current market value of £250,000. The gain of £150,000 is chargeable on Mr and Mrs Smith, but they can make a claim for relief under section 260 of the TCGA 1992 to allow the chargeable gain on the property to be held over. This means the base cost of the property in the trust will be £100,000, rather than the market value at the date the property entered the trust.

Similarly, if the trustees of the discretionary trust decide a few years later to transfer the property to Paula, it may also be possible for the trustees to claim relief under section 260 and defer the gain until Paula sells the property.

However, holdover relief which has already been claimed on a disposal may be withdrawn (or ‘clawed back’) from the transferor in some cases. This can apply broadly to the relevant disposal if, for example, during a ‘clawback period’ (up to six years after the end of the tax year of disposal) the trust becomes settlor-interested, or an arrangement comes into existence whereby the trust may become settlor-interested (section 169C(2) of the TCGA 1992).

A potential for CGT on property also needs to be considered when estate planning. It may be that the properties with the highest gains are transferred on death to benefit from the CGT uplift.


Example 3

Mark and Jen are both married for the second time. Each has children from a previous marriage. They also have two children together. Their property was purchased together, but Mark contributed £200,000 more than Jen. They request advice on how they might provide for one another for as long as possible and thereafter ensure that their children will benefit.

Example 3 raises the following questions for open discussion:

  • Is the property owned as joint tenants or tenants in common?
  • Are Mark and Jen aware of the implications arising from the ownership?
  • Does a joint tenancy need to be severed to achieve their wishes, such as Mark and Jen each passing their share to their children from the previous relationship?
  • If the property is owned as tenants in common, is there a declaration of trust setting out their shares, or do they both consider that the property is now owned equally, regardless of how much they each contributed?
  • Do they wish to give one another a right to reside or a life interest in their property after their deaths? If so, discuss when and how their children will benefit.

IHT implications

If two or more (unmarried) people own property as tenants in common, they each own their share of the property, and that share will pass on death to a named beneficiary in their will. The value of this share can be further reduced to reflect the fact that it is difficult to sell part of a property. This reduction (known as the tenanted deduction) is usually between 10% and 15%.

If the property is held in a life interest, at the death of the life tenant, it is treated for IHT purposes as if it belonged to the life tenant, so it will attract spouse relief.

CGT implications

If the trustees choose to sell the property, CGT will need to be considered. Some relevant points include the following.

  • In 2019/20, trustees have a CGT allowance of £6,000 (50% of the individual CGT allowance).
  • If the life tenant lives in property held by trustees, trustees can claim private residence relief on the sale of the property.
  • On the death of the life tenant, the trust assets benefit from an uplift in value to the date-of-death market value, so no CGT is due.

How did the previous marriage end?

Were either of the clients widowed before they remarried? Are there assets from a deceased former spouse that may need to stay with one side of the family? Are there additional NRBs and RNRBs to be claimed?

IHT implications

If one is widowed – or if both are – they may be entitled to an uplift in their NRB and RNRB. If the deceased former spouse died on or after 9 October 2007, and their spouse or civil partner died before them without using all their available NRB at the date of death, then a proportion equivalent to the unused percentage can be transferred for use on the survivor’s death. It does not matter how long ago the first spouse died (except for civil partners, when the first death must have occurred on or after 5 December 2005, since civil partnerships were not recognised before that date). The amount transferred is the unused proportion of the NRB, not the actual amount unused.

Example 4

Jane was married to John. Jane died first, aged 42, in 1965. John later married Mary. John died in 1980. Mary died recently. How much NRB and RNRB is available?

In example 4, Mary died after October 2007, so the first condition is met. We now look to her spouse, John, to understand if there is any available NRB to transfer. As John remarried, Mary was the surviving spouse of someone who had themselves survived an earlier marriage. We need to ascertain if John was entitled to any NRB on the death of Jane. Because John died before October 2007, we cannot claim any uplift in John’s NRB, as this was before it was possible to claim the transferable NRB.

John still has his own NRB, so we need to establish how much of this was unused on his death. Assuming £50,000 of John’s estate was taxable, the NRB at that time was £118,000. John therefore used 42% of his NRB, leaving 58% available to transfer to Mary; 58% of the current NRB is £188,500. Mary’s NRB is uplifted by that amount. Mary’s estate will also benefit from a 100% uplift in the RNRB, as the RNRB may be transferred between spouses and only on death.

Spouse is non-UK-domiciled

Where the first person to die is non-domiciled (and not deemed domiciled) in the UK, the transferable NRB on the estate is calculated only by reference to property that is potentially subject to a UK IHT charge. See HMRC’s Inheritance Tax Manual section IHTM13040.

If the surviving spouse was not domiciled and not deemed domiciled in the UK when the first spouse or civil partner died, the spouse exemption for assets passing to the surviving spouse or civil partner is limited, unless the non-domiciled spouse elects to be treated as UK-domiciled. The maximum spouse exemption for transfer to a non-UK domiciled partner is £325,000. So, if the entire estate passed to the surviving spouse or civil partner, the amount in excess of £325,000 is chargeable. There will only be transferable NRB available if the net estate is less than the NRB plus £325,000.

Claiming the transferable NRB

Preserving information on the first death is an essential step for claiming the transferable NRB.

If the first spouse dies with unused NRB, the survivor should retain the records necessary to establish the claim on their death.

The main aim is to pre-empt and avoid family conflict arising

Those claiming on behalf of the survivor’s estate must complete either form IHT402 or form IHT217. Since much of the information needed to complete those forms is available following the first death, it is good practice to complete form IHT402 as part of the administration of the first estate and preserve the information. Ideally, the completed form should be retained with the survivor’s will, along with detailed records relating to the first death, as set out by HMRC.

Following the survivor’s death, a claim must be made by their personal representatives to transfer any unused NRB, and submitted within two years of the end of the month of death.

The divorce order

Are there provisions in the order as to the devolution of the couple’s assets, or a property in which an ex-spouse remains entitled to reside? In the order, there may be no references or exclusions to any claims on an estate under section 2 of the Inheritance (Provision for Family and Dependants) Act 1975.

If there are no exclusions to a claim (and we have a duty to advise clients whether a claim could be brought), it may be appropriate to set up a discretionary trust will, including the ex-spouse as a discretionary beneficiary, therefore making a claim on the estate (by a discretionary beneficiary of the will) less likely to be successful.

IHT implications

A named discretionary beneficiary has no absolute right to benefit. Instead, they have a hope to benefit from a discretionary trust. By preparing a discretionary trust will, the RNRB cannot be claimed. However, the RNRB and transferable RNRB could be saved by appointing the property to a surviving spouse or children within two years of the date of death under section 144 of the IHTA 1984.

Assets passing outside the estate

Clients who have been married previously should ensure that the beneficiary of their pension scheme on death reflects their wishes. Often, the beneficiary unintentionally remains the ex-spouse.

Any discretionary lump-sum pension payments made at death are outside of the estate and not subject to IHT. Large occupational schemes and insurance companies usually (but not always) include the favourable discretionary conditions in the standard pension scheme rules (which should be reviewed in detail). Notably, certain public sector pension schemes make death benefits payable to the estate, or to a beneficiary under a binding nomination. In many cases, the lump sum will be payable to a spouse and so gain exemption that way. Sums payable to other dependants and cohabitees are taxable.


You should consider whether there is potential for a conflict of interest between the spouses. Consider if they each require independent tax and legal advice. Be alert if one client is more dominant, as this could signal a conflict between them.


Are the clients mainly concerned with the tax implications of their decisions, or is their priority determining where their assets will end up?

If clients start the conversation by talking about tax, it is worth drawing their attention to the reality that the tax position could change yearly. In 2018, the government authorised the Office of Tax Simplification to review the IHT regime, which has since made several recommendations for reform (see ‘Beast of burden’ by Dawn Joughlin in this edition).

Conversely, HMRC recorded the highest ever IHT receipts in 2017/18. It is unlikely that the government would abolish a tax where revenues are increasing, so the focus for the client should be their wishes for their estate, before considering the most tax-efficient way to achieve them.