The Property (Relationships) Act 1976 provides that inherited property is separate property and so is immune to claims by a spouse or partner.
It does not however always stay separate property, and if for example, the inheritance monies are applied in reduction of a mortgage over the family home for the benefit of both spouses, it will lose its character as separate property and the increased equity in the home will remain subject to equal sharing under the Act. This would not apply if the asset inherited remained separate and apart from relationship property, e.g. a commercial building or a farm, which remained in the sole name of the spouse inheriting that property.
It is important therefore for partners to consider whether all of the inherited property is intended to become relationship property or not. Particularly in second or subsequent relationships, there may be an intention that certain inherited property, e.g. a farm, would pass down the family line rather than be subject to equal sharing as if it were relationship property.
In many families a pooling of resources approach is adopted and inherited property is merged with other relationship property. If this is not desired, it is necessary to undertake specific action. The first choice would be not to intermingle the inherited property with relationship property, leaving inherited property either on deposit at a bank or in the form of investment inherited by that person so that it is clearly identifiable and kept as separate property.
Alternatively, it is possible for the couple to enter into a contracting out agreement which would recognise that where a significant contribution by way of separate property is made and it is to retain that status, or be compensated for, that is recorded. These agreements under the Property (Relationships) Act must be certified and signed before independent solicitors. Such an agreement would provide that the person who inherited the property would receive that portion of any subsequent sale of relationship property in addition to their entitlement to relationship property.
Another alternative would be to form a trust to receive the inheritance, so that the inheritance would pass to the trust and remain outside the ambit of Property (Relationships) Act.
In most long term relationships, modest inheritances will not be an issue for the couple and will be treated as relationship property and applied for the benefit of the family as a whole. However, where significant separate property is involved and the relationships have not been long term or involve a second or subsequent relationship where children from two relationships may need to be considered, a discussion of what part of the inherited property should be kept separate or made relationship property is recommended and the options outlined above given due consideration.
For advice on Property Relationship Agreements, contact Gerry Sullivan (Partner)