In a further twist on marital matters and wealth management, this article explores what the legal rights are when a union is called off - and money has already changed hands.

Marital strife seems to generate more than its fair share of coverage in the wealth management pages, not least because the eye-watering sums involved in disputes highlight how the most careful stewardship of a fortune can be wrecked by lack of clear legal thinking. There is the ongoing case of hedge fund tycoon and philanthropist Christopher Hohn, who is in divorce proceedings against Jamie Cooper-Hohn. (That case is ongoing at the time of publication). Other high-profile cases in recent years include those of embattled Formula One motor racing boss Bernie Ecclestone, and former Beatle, Sir Paul McCartney.

Mention of celebrity brings us to a man basking in public glory – golfer Rory McIlroy, who last weekend won the British Open tournament, seeing off the likes of Sergio Garcia and Tiger Woods, among others. But not so long ago, he suddenly broke off a wedding, raising the ticklish issue of an expensive diamond engagement ring he had bought. And given the wealth of some high-profile couples, the sums involved are large enough to warrant a piece of legal advice, however unromantic. So Elen Stritch, associate of law firm Stevens & Bolton, passes on some ideas that wealth managers might want to share with their clients if marriage plans are in the offing. As always, the views here are not necessarily shared by this publication’s editors.

The rules of engagement are far from straightforward.  A simple internet search produces hundreds of "guides" to buying an engagement ring. However, what most do not deal with (and what very few people are aware of) are the potential tax consequences of gifting an expensive engagement ring or what happens to the ring when an engagement, or subsequently a marriage, breaks down.

So what does the individual gifting an engagement ring need to think about?

It’s been reported that when Rory McIlroy broke off his engagement to tennis player Caroline Wozniacki earlier this year he agreed to let her keep the (rather large) diamond engagement ring. This might have seemed like a gentlemanly gesture in the circumstances. However, in reality it was likely to have been hers to keep anyway.

Under English law, an engagement ring is presumed to be an absolute gift. That is, unless it was given on the condition that it would be returned if the marriage did not take place. Admittedly, this is not the most romantic of conversations.

It does not matter who terminates the engagement either. This is difficult advice to deliver to a client whose fiancée has called off the wedding not long after receiving a six-figure diamond.

An exception is if the ring is a family heirloom. In such circumstances, there is likely to be an implied condition that the ring is not an absolute gift but instead, is conditional upon the marriage taking place.

Those thinking of proposing with an inherited ring might breathe a sigh of relief.  That is, until they learn that they could be hit with a capital gains tax bill on the “disposal” of a ring worth more than £6,000 ($10,236). The transfer of the ring isn’t between spouses so there is potential capital gains tax liability chargeable on the difference (if any) between the value of the ring when it is gifted and the “probate” value when it was inherited. 

One solution is to gift the engagement ring after the marriage to take advantage of the capital gains exemption between spouses. That is of course far from ideal though and again, not particularly romantic.

Capital gains tax is not the only tax operating here with stealth.  If an engagement ring is bought from a far-flung destination, when it’s brought back into the UK it could attract customs duty or import VAT. George Clooney reportedly fell victim to this recently when his barrister fiancée flew into Heathrow wearing her half a million pound engagement ring brought in from California.

For inheritance tax purposes, gifts to an engaged couple are exempt but only up to certain limits, including £2,500 each between the couple themselves. The consequence is that the value of an engagement ring over and above £2,500 may be chargeable for inheritance tax purposes if the ring giver dies within seven years of the gift. This exemption does not apply at all if the marriage does not take place.

Anyone gifting family jewellery that they want to protect would be advised to consider entering into a nuptial agreement. Such agreements are not uncommon for individuals trying to protect inherited wealth. They can be “tailor-made” and can provide for the return of family jewellery in the event that the marriage breaks down.

So whilst this might not be the most romantic guide to buying an engagement ring, hopefully it is a practical one. Once the happy couple are married, with the tax return complete and/or pre-nuptial agreement signed, they can get on and enjoy their marriage – with only the large insurance bill for the diamond to worry about.