From an IHT perspective, the creation of a trust under either a Mesher or Martin order should have no immediate adverse effects provided it is entered into before the decree absolute or dissolution order.
However, IHT is discussed further below.
A deferred charge differs from a Mesher or Martin order in that the property moves into, or remains, in the sole ownership of the occupying spouse.
The interest of the non-occupying spouse is represented by a charge over the property.
This charge is enforceable on the occurrence of a specified event, again likely to be the youngest child reaching 18 or leaving education.
The charge is either a percentage of the eventual sale price or a fixed sum.
Generally, a percentage is considered preferable in order to permit the non-occupying spouse to share in any increase in value of the property in the intervening period.
The CGT analysis will vary according to the alternative chosen and tax advice should be taken before any decision is made.
For most couples, the inheritance tax (IHT) implications of divorce are limited, as any transfer of assets between them should be covered by the spouse exemption, provided it is made before decree absolute or a dissolution order.
Even after that event, transfers are likely to escape an IHT charge on the basis that they are not intended to confer gratuitous benefit, for example, because they take place as a result of a court order or compromise agreement between the parties.
However, where an ongoing trust is created, including a deferred trust of land depending on its terms, there may be a risk of future IHT charges arising.
Therefore, it is important that IHT advice is always taken as part of any financial settlement.
For couples where one spouse is UK domiciled and the other is not, the spouse exemption is limited to £325,000 (in tax year 2019/2020) for transfers from the UK domiciled spouse to the non-UK domiciled spouse.
Any sum transferred in excess of that amount will be treated as a "potentially exempt transfer" and will also be exempt from IHT provided the transferor spouse survives for seven years following a transfer.
Taper relief is available to reduce IHT liability in respect of transfers made between three and seven years prior to the death of the transferor.
While the IHT implications of separation or divorce itself may be limited, once any financial settlement is finalised, both parties should take their own estate and tax planning advice to ensure that their wills and other financial arrangements are updated to reflect their new status and to be as tax-effective as possible.