Divorce and finances

The introduction of no-fault divorces has been widely applauded, as they tend to be less  fractious and confrontational. This move has, however, led many people to try and ‘go DIY’ over the whole process, including the financial aspects.

This is understandable as people are keen to avoid hefty solicitor’s bills, which can run into many thousands of pounds, but it can lead to a dispute over the financial settlement, which can drag on for a long period. An agreement over the splitting of assets that is arrived at amicably, and preferably at an early stage, is essential if both parties want to minimise stress and expense.

No-fault divorces have made the process of obtaining a divorce faster, easier, and less contentious. This is because it eliminates the need to attribute blame or highlight poor behavior. This legislation was introduced on April 6, 2022. You can now apply for a divorce online, with a joint or sole application, for a fee of £593.

Not necessarily. Between January and March 2023, there were 28,865 divorce applications made¹. This was a decrease of 5% from the same quarter in 2022, prior to the introduction of no-fault divorce legislation.

This small annual drop shows that the introduction of no-fault divorce legislation has not necessarily opened the floodgates for divorce proceedings.

Without professional advice, it can be difficult to see what a fair divorce financial settlement is. Fair does not necessarily equate to a 50/50 split of assets.

A financial planner will talk to you about your income, employment and expenditure and by doing so, put context around a settlement. On paper, a figure is just that – a number. Essentially, it means nothing. As financial planners, we take this figure along with details of any other assets, including your home and any other properties, to help you answer questions such as:

• How much can I afford to spend?
• Do I need to start working again?
• Can I afford to study or retrain?
• When can I afford to retire?
• Can I afford to buy and run a house?

Answering these questions will help establish if you need a higher settlement. Take for instance someone who is the primary carer of school-age children. It may be impractical for them to work full-time and a higher settlement for their and their children’s benefit may be required.

Living as part of a couple is normally cheaper and more financially flexible than funding two separate properties and lifestyles. Starting a life as a single person can be financially challenging. This is particularly true when it comes to property expenses such as mortgages and rent.

Traditionally, the most popular option has been for one person to remain in the family home as it can avoid some legal, mortgage and property transaction fees. If one person stays in the property, they usually need to pay the other person for their share of ownership. If they don’t have this money immediately available, the hike in interest rates could make it difficult for them to obtain and repay the extra borrowing.

Many people think that keeping the marital home will cause the least amount of disruption to any children involved. The reality is that those children’s circumstances have changed tremendously and keeping the family home is not going to change that. Sometimes, it's best to start fresh in a new, more affordable home.

Despite the current mortgage and property crisis, a financial planner can assist you in determining your affordability. At Evelyn Partners, we use cashflow modelling to take into account your individual circumstances and look at different scenarios to help you make the best choices.

If buying out your ex-partner from your marital home isn’t a viable option, we can help you see what you can afford. This will help you make plans for you and your family, like downsizing or moving to a different area. Knowing what you can afford will prevent future financial problems and help you move forward in life.

Divorce can sometimes require the transfer or disposal of assets and this can have capital gains tax consequences. The transfer of assets between couples in a marriage or civil partnership takes place on a ‘no gain, no loss’ basis for capital gains tax purposes. This means that no tax is crystallised on the transfer, with the receiving person effectively taking the other’s base cost. This rule used to apply only up to the end of the tax year following a permanent separation.

The rules on this changed on 6 April 2023. This treatment is now available for up to three tax years after the end of the tax-year of separation, or for an unlimited time when the assets are transferred as part of a formal divorce agreement.

This change to the rules has provided divorcing couples with more time and flexibility to arrange their financial affairs under the settlement. Changes to the rules around private residential relief also mean that if you retain a share in the family home, you will be able to claim relief from capital gains tax on any profits made if the property is sold to a third party, even if you have bought another home since.

However, although the changes have made the splitting of assets easier and fairer, there are still potential issues to be aware of. While the rules work on a ‘no gain, no loss’ basis, they do not remove the inherent gain within the asset.

To understand the real value of your divorce settlement, you need to understand your ‘net of tax’ position. This isn’t always easy to ascertain. A financial adviser will be able to help you to fully comprehend this and therefore empower you to make informed decisions about your assets and finances moving forward.

Our financial planners use cashflow modelling to show what your financial future could look like after a divorce. By using details of your individual circumstances, they assess what you have now against what you could have in the future to calculate if there is a shortfall and how it can be addressed.

Cashflow modelling can help you answer questions regarding the marital home and pensions. It can also help when establishing a fair financial settlement. But most importantly, it can give you peace of mind about your future.

Pensions are one of the biggest sources of confusion and dispute during a divorce, especially when one person has a significantly larger pension provision than the other. After property, pensions are often the most valuable asset in a marriage, making up 42% of household wealth².

Despite their weighty value, many couples do not discuss retirement savings and pensions as part of their settlement³. This could have a significant impact on a single person’s standard of living in retirement.

It's crucial to accurately value pensions and reach an informed agreement before a financial settlement is reached. Once the final order is made, it is extremely difficult to change. Financial advice is often required when valuing and deciding on how to split a pension. There are various ways to split pensions including:

• Pension sharing orders, where you will be given a share of the other person’s pension and then you can decide what to do with the funds
• Pensions offsetting, when the value of a pension fund is offset against other former matrimonial assets (such as the marital home)
• Pension attachment (available in England, Wales and Northern Ireland) or pension earmarking (available in Scotland), where either part or all of the pensions are paid out to a former husband, wife or civil partner, but only after the pension pays out

Pensions and divorce are an area where seeking good financial advice makes sense.

Sources:

¹ Gov UK, Family court statistics quarterly: January to March 2023, 2023

² Office for National Statistics, Household total wealth in Great Britain: April 2018 to March 2020, 2022

³ Which?, Seven in 10 divorcing couples don't share pensions, 2022