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  • FIRST POST
    • JamTomorrow
    • By JamTomorrow 18th Mar 17, 6:41 AM
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    JamTomorrow
    Tactical Divorce - Tax Avoidance or Tax Planning?
    • #1
    • 18th Mar 17, 6:41 AM
    Tactical Divorce - Tax Avoidance or Tax Planning? 18th Mar 17 at 6:41 AM
    Whilst many years away, and the rules are bound to have changed by the time I come to retirement, I am interested on opinions of whether a tactical divorce that resulted in a transfer of half of my pension to her would be seen as tax avoidance or tax planning?

    It would seem to me that if the sole purpose of the divorce was to transfer half my pension, and that we continued our lives as before the divorce, then it wouldn't be looked upon too favourably ....
Page 1
    • ermine
    • By ermine 18th Mar 17, 8:32 AM
    • 514 Posts
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    ermine
    • #2
    • 18th Mar 17, 8:32 AM
    • #2
    • 18th Mar 17, 8:32 AM
    Whilst many years away, and the rules are bound to have changed by the time I come to retirement, I am interested on opinions of whether a tactical divorce that resulted in a transfer of half of my pension to her would be seen as tax avoidance or tax planning?
    Originally posted by JamTomorrow
    Since you say it's many years away, wouldn't a more intelligent approach be for you to pay into her SIPP over the years, thus getting tax advantages (although you pay the tax, she gets the benefit of the tax bump-up into the SIPP).

    Doing this over time means she would be able to build up a decent pension in her own right, since presumably the aim of your enterprise is to spread your pensions more evenly to maximise the value of the personal allowances?
    • Triumph13
    • By Triumph13 18th Mar 17, 11:07 AM
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    Triumph13
    • #3
    • 18th Mar 17, 11:07 AM
    • #3
    • 18th Mar 17, 11:07 AM
    presumably the aim of your enterprise is to spread your pensions more evenly to maximise the value of the personal allowances?
    Originally posted by ermine
    Not necessarily, it may be that he has more 40% income than he can pay into his pension without running into Lifetime Allowance issues or having to pay HRT in retirement whilst his wife is a non taxpayer or basic rate taxpayer.


    A more tax efficient method would be just to fake his own death and then she can get the whole lot tax free if it's a DC scheme!
    Last edited by Triumph13; 18-03-2017 at 11:10 AM.
    • davieg11
    • By davieg11 18th Mar 17, 11:08 AM
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    davieg11
    • #4
    • 18th Mar 17, 11:08 AM
    • #4
    • 18th Mar 17, 11:08 AM
    If it's a dc pension, you could take 25% tax free at 55, then put it into wife's pension. Depending how much she earns will determine how many years it would take to put in. It would be boosted by 25% tax relief. You could also take £1100 allowance from wife to reduce her tax free limit to £10,400 and increase yours to £12,600 this April.
    • kidmugsy
    • By kidmugsy 18th Mar 17, 12:13 PM
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    kidmugsy
    • #5
    • 18th Mar 17, 12:13 PM
    • #5
    • 18th Mar 17, 12:13 PM
    It would seem to me that if .... we continued our lives as before the divorce
    Originally posted by JamTomorrow

    How would they know? If your wife had a separate address to which her mail was delivered, and if you were careful not to take foreign holidays together ..... Though I suppose the NSA could advise HMRC how often you telephoned each other, and e-mailed each other, and what you said. But use of pay-as-you-go phones and some suitable encryption one-time pads might solve that.

    And oh the thrill of the derring-do!
    • MoneySavingUser
    • By MoneySavingUser 19th Mar 17, 1:24 PM
    • 1,573 Posts
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    MoneySavingUser
    • #6
    • 19th Mar 17, 1:24 PM
    • #6
    • 19th Mar 17, 1:24 PM
    Whilst many years away, and the rules are bound to have changed by the time I come to retirement, I am interested on opinions of whether a tactical divorce that resulted in a transfer of half of my pension to her would be seen as tax avoidance or tax planning?

    It would seem to me that if the sole purpose of the divorce was to transfer half my pension, and that we continued our lives as before the divorce, then it wouldn't be looked upon too favourably ....
    Originally posted by JamTomorrow
    You aren't the first person to have had this idea.

    I can't recall if there is specific legislation to prevent this, but there is general tax avoidance legislation which could be used to challenge this arrangement and the courts could rule that it goes against the intention of the legislation.

    Also, if you have been dishonest in divorce proceedings, the courts can go back and unwind the settlement.

    On a similar topic, for the purposes of the additional 3% stamp duty legislation married couples are treated as the same unit but unmarried ones are not, so doing transactions before getting married or not getting married at all are legitimate ways of avoiding the additional 3% in some cases!
    • TBC15
    • By TBC15 19th Mar 17, 4:19 PM
    • 97 Posts
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    TBC15
    • #7
    • 19th Mar 17, 4:19 PM
    • #7
    • 19th Mar 17, 4:19 PM
    Not necessarily, it may be that he has more 40% income than he can pay into his pension without running into Lifetime Allowance issues or having to pay HRT in retirement whilst his wife is a non taxpayer or basic rate taxpayer.


    A more tax efficient method would be just to fake his own death and then she can get the whole lot tax free if it's a DC scheme!
    Originally posted by Triumph13
    If I faked my own death would this affect my PA assuming I still had 9yrs to run on my UK passport.
    • bigadaj
    • By bigadaj 19th Mar 17, 6:37 PM
    • 8,606 Posts
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    bigadaj
    • #8
    • 19th Mar 17, 6:37 PM
    • #8
    • 19th Mar 17, 6:37 PM
    If I faked my own death would this affect my PA assuming I still had 9yrs to run on my UK passport.
    Originally posted by TBC15
    Depends if you have a canoe or not.
    • Silvertabby
    • By Silvertabby 19th Mar 17, 8:23 PM
    • 778 Posts
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    Silvertabby
    • #9
    • 19th Mar 17, 8:23 PM
    • #9
    • 19th Mar 17, 8:23 PM
    The 50% pension transfer to a spouse in divorce isn't automatic. The value of your pension 'pot' is just another marital asset, along with the equity in your house, savings, investments etc. Your pension provider will want a copy of your divorce court order before setting up the pension sharing order - so you will have to go through the rigmarole of a divorce hearing and the allocation of all other marital assets. Very messy.
    • ThinkingOutLoud
    • By ThinkingOutLoud 19th Mar 17, 8:32 PM
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    ThinkingOutLoud
    Of course - if you are not married - there could be IHT to consider on death of the first now unmarried party?

    If LTA is an issue before 55 - lucky you.

    If sometime after - as stated - drawdown and put into her pension. If she is same age you can do so for many years from 55 to balance things as suggested before she draws anything.

    And invest your TFLS in her name...that is 25% shifted pronto. Juggling it into ISAs as allowances permit.

    A fake divorce sounds like something that might cause you to look over your shoulder more than an affair! But, it might make retirement more interesting for you, fooling HMRC and the courts if you could and that is your bent. You'd save on pension while in prison too.

    Or you could simply balance between you as best you can and pay the tax due and enjoy life without worry by the sounds of it.
    I am just thinking out loud - nothing I say should be relied upon!
    I do however reserve the right to be correct by accident.
    • Triumph13
    • By Triumph13 19th Mar 17, 9:20 PM
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    Triumph13
    Depends if you have a canoe or not.
    Originally posted by bigadaj
    I can rent him one for a very reasonable price
    • JamTomorrow
    • By JamTomorrow 20th Mar 17, 9:12 AM
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    JamTomorrow
    Thanks for all the input and I think I can let the Wife know I wonít be engineering a divorce for financial reasons.

    The complexity, IHT on death and the fact that it is probably tax avoidance means Iíll have to explore other ways of trying to manage our joint retirement planning versus tax situation.

    I donít think our situation is all that common and whilst it is a nice problem to have in the future I would value any suggestions on how we can maximise our retirement financial planning both pre and post retirement :

    1. My SIPP is on track to be ~ £1m in real terms when I plan to take it at 57 (16 years away). If I maintain current level of contributions a real return of ~ 3.2%pa would result in me exceeding the LTA. If I stopped contributions into my pension today then a real return of just under 6% would result in exceeding the LTA.

    2. To the point in 1 itís not worth reducing/stopping my pension contributions as long as my company continue a 1:1 contribution match.

    3. In addition, my taxable income is now starting to get just above £100k each year and at the 60% marginal rate of tax I am putting anything above £100k into my SIPP as AVCs even though I may exceed the LTA (make hay when the sun shines). I also donít expect any government to start to raise the £100k at which you start to erode the personal allowance so this is probably going to result in my AVCs rising year on year.

    4. My Wife doesnít work and isnít planning to any time soon. She currently contributes £2,880 into a HL SIPP that gets topped up to £3,600. I forecast that at her retirement age there will be ~£100k in this pension for us to draw down from.

    5. In retirement our joint Ďnumberí for spending is ~£30k per annum. Plan would be to take out of each of our pensions to the personal allowance and then top up out of ISA savings/TFLS so as to get an effective joint tax rate of 0% in retirement.

    6. Problem is my Wifeís pension pot for drawdown will run out after 10-15 years so Iíll need to drawdown at levels meaning I need to pay the basic rate of tax. If I could get more pension income into my Wifeís name then it would reduce / potentially eliminate any tax incidence in retirement.
    • wotsthat
    • By wotsthat 20th Mar 17, 10:02 AM
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    wotsthat
    IMO you're a good candidate for a tactical divorce as you're currently planning not to use your wife's tax allowance for the rest of your lives.

    Divorcing, splitting the assets and doubling your joint tax allowance will make a huge difference especially as a £1m pension pot won't put you in the mega-rich category.

    £2k less tax pa for the rest of your wife's life will make a difference.

    Oh, and don't worry about IHT. After the divorce and the assets are split you might find it was all a mistake and decide to remarry.
    • Triumph13
    • By Triumph13 20th Mar 17, 10:05 AM
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    Triumph13
    Plan would be to take out of each of our pensions to the personal allowance and then top up out of ISA savings/TFLS so as to get an effective joint tax rate of 0% in retirement.
    Originally posted by JamTomorrow
    That's likely to be a very bad idea if rules on the LTA don't change. Say your SIPP is £1m at retirement and you take £250k TFLS and put £750k into drawdown. If you only take the PA out per year then you will be heading for a big LTA tax charge at age 75. 3% real growth and 2% inflation would be £37,500 a year. If you only take £11,500 out each year then your drawdown pot would have grown by more than £700k by age 75 and all that absolute growth would be clobbered with an LTA charge.
    You really need to plan to take out pretty well your full basic rate band each year.
    • MEM62
    • By MEM62 20th Mar 17, 10:17 AM
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    MEM62
    Aren't all divorces 'tactical'?
    • JamTomorrow
    • By JamTomorrow 20th Mar 17, 11:07 AM
    • 70 Posts
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    JamTomorrow
    IMO you're a good candidate for a tactical divorce as you're currently planning not to use your wife's tax allowance for the rest of your lives.

    Divorcing, splitting the assets and doubling your joint tax allowance will make a huge difference especially as a £1m pension pot won't put you in the mega-rich category.

    £2k less tax pa for the rest of your wife's life will make a difference.

    Oh, and don't worry about IHT. After the divorce and the assets are split you might find it was all a mistake and decide to remarry.
    Originally posted by wotsthat
    I'm with you that £1m isn't fat cat territory particularly when it has to fund a couple, one of which gave up their career to raise their children.

    Whilst it's a pity that that marriage isn't rewarded in the tax system it would hardly be an election winner to allow marital transfer of tax allowances for the relative low number of couples in our situation.

    Maybe time to try and drop to a 4 day week to avoid the 60% marginal rate of tax and enjoy some time away from work in my 40s and not just my 50s.
    • JamTomorrow
    • By JamTomorrow 20th Mar 17, 11:13 AM
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    JamTomorrow
    That's likely to be a very bad idea if rules on the LTA don't change. Say your SIPP is £1m at retirement and you take £250k TFLS and put £750k into drawdown. If you only take the PA out per year then you will be heading for a big LTA tax charge at age 75. 3% real growth and 2% inflation would be £37,500 a year. If you only take £11,500 out each year then your drawdown pot would have grown by more than £700k by age 75 and all that absolute growth would be clobbered with an LTA charge.
    You really need to plan to take out pretty well your full basic rate band each year.
    Originally posted by Triumph13
    I'd completely forgotten about this which creates an even stronger argument / desire to be able to split the £1m 2 ways in a tactical divorce.

    Otherwise you are right that I am going to need to draw down to the top end of the basic rate tax band each year so as to avoid the LTA charge at 75.

    I suppose I couldn't employ my Wife now as a child minder, cleaner, etc so as to provide her with an income now that could all be invested in a pension for her
    Last edited by JamTomorrow; 20-03-2017 at 11:27 AM.
    • Triumph13
    • By Triumph13 20th Mar 17, 11:53 AM
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    Triumph13
    I suppose I couldn't employ my Wife now as a child minder, cleaner, etc so as to provide her with an income now that could all be invested in a pension for her
    Originally posted by JamTomorrow
    Now that is an interesting thought. If she has no other income then I wonder what would stop you from paying her £150 a week, which would get her NI stamp for her without either of you paying NI, and then stick 80% of it into a SIPP or PP to get credited with relief on tax you hadn't paid?
    • michaels
    • By michaels 20th Mar 17, 8:53 PM
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    michaels
    Now that is an interesting thought. If she has no other income then I wonder what would stop you from paying her £150 a week, which would get her NI stamp for her without either of you paying NI, and then stick 80% of it into a SIPP or PP to get credited with relief on tax you hadn't paid?
    Originally posted by Triumph13
    I wonder if this has legs - sounds really interesting for those of us with annual allowance or lifetime allowance (I wish) issues - or even just to move pension contribution from my pension to hers to maximise the use of the tax free allowance in retirement.

    How straight-forward is it for me to pay my spouse - would I need to be a company or perhaps she would need to be self-employed?

    If all her pay goes into a pension it doesn't credits entitlement.

    Say 10kpa paid to spouse pay 8k into pension grossed up to 10k in pension = 2k gain and it is in her pension not mine and due to annual allowance I can't pay in any more into my pension let alone sal sac.

    Of course one can't live on zero salary every year but it can be better value to contribute big some years and small in other years.

    I think it may not work though because we would lose the 2880/3600 pension allowance that we currently offset against other income for tax credits purposes with a withdrawal rate of 41% that would be expensive to lose along with the 720 of pension gain it would outweigh the income grossing up from the 10k 'salary'....
    Cool heads and compromise
    • ThinkingOutLoud
    • By ThinkingOutLoud 20th Mar 17, 9:23 PM
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    ThinkingOutLoud
    Though the canoeing would be fun...
    • You are not so unique as you claim - many people have seen one partner raise the kids and the other earn higher rate tax and so save into the pension. Good plan with higher rate tax benefit.
    • You should know what state pension your wife will get. She would get something (esp. if she works even one year and pays NI - I think).
    • You can transfer some of her tax free allowance to yourself anyway (as stated already and only if not divorced).
    • Your wife would not pay basic rate on her first 11.5k. BUT after taking away her SIPP and any state pension she can get from that leaves you with a rather reduced sum on which you can save tax by moving things to her after SP age anyway.
    • I reckon you would be able to shift a fair chunk to her SIPP - increasing her earnings in time.
    • The LTA is set to be £1M and then for now at least is set to rise with CPI - so won't be £1M in 16 years when you talk about retirement. So it is the LTA when you retire you need to figure.
    • But if you did nothing and she had no pension or other income - you are talking about saving 20% of what sum is the thing to work out?
    • With pot of £1M - when are you planning to enjoying it? You will have to pay some 20% tax even if you managed to split 50/50 unless you will live way past 100.
    • The IHT impact seems to far outweigh any benefit? Why do you dismiss this?

    You are going to pay 20% tax on some of your income. Better off pensioners pay tax too!

    Finally, maybe your wife will like the idea of a divorce. I hear the canoe instructor is good looking :-)
    I am just thinking out loud - nothing I say should be relied upon!
    I do however reserve the right to be correct by accident.
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