Mortgage crisis complicates the property conundrum for separating couples

Quarterly Family Court Statistics from the Ministry of Justice today revealed that there were 28,865 divorce applications made in January to March 2023. This was a decrease of 5% from the same quarter in 2022, when applications were made under the previous legislation. There were 27,465 final orders in January to March 2023 (18,164 granted under the new divorce law, whilst 9,301 decree absolutes/final orders granted under old divorce law) - an increase of 15% compared to the same quarter in 2022.

Before the enactment of No-Fault legislation in April 2022 – which has made obtaining a divorce potentially simpler and less contentious by removing the need for one party having to allege bad behaviour by the other or prove fault, and even allowing joint applications - the ONS found from the 2021 census that about 42 per cent of marriages were ending in divorce.

Ben Glassman, Financial Planning Partner and Head of Family & Divorce at leading wealth management firm Evelyn Partners, says:

"The small annual drop in applications shows that No-Fault legislation has not necessarily opened the floodgates for divorce proceedings - although initially after the law was enacted there was a bump in applications from couples who had been waiting for it to arrive. Now, in England and Wales, someone can apply for divorce on the grounds that a marriage has irretrievably broken down, without the need to attribute blame. Couples can also now end their marriage jointly.”

Glassman applauds the move towards less fractious and confrontational divorces, with most couples relieved to avoid costly legal exchanges over the separation itself.

However, he warns: “The temptation is to try and ‘go DIY’ over the whole process, including the financial settlement. This is understandable as people are keen to avoid hefty lawyers’ bills, which can run into many thousands of pounds.

“But the biggest legal bills occur when there is a dispute over the financial settlement, which is a separate matter to the divorce itself, and can often drag on much longer. An agreement over the splitting of assets that is arrived at amicably, and preferably at an early stage, is pretty much essential if both parties want to minimise stress and expense.

“For many couples to achieve this, advice from a financial planner with experience of divorce will be invaluable, particularly where pensions or other complex matrimonial assets are concerned.”

The financial implications of divorce are more paramount than ever, with the cost-of-living crisis now being exacerbated by a cost of borrowing crisis, and a possible economic downturn on the way. Mortgage rates have soared and there is the threat of a significant decline in property prices, and even further down the line some job insecurity.

Glassman says: “It is the case that living as part of a couple is usually cheaper and more financially flexible than living alone, and marriage also carries many tax advantages. Those embarking on life as a single person, particularly if they have been married for many years, can experience something of a financial shock - and nowhere is that more noticeable now than in regard to property, mortgage and rental costs.”

With higher rates suddenly making home loans very expensive, finding a solution to the property conundrum at separation could be trickier.

Glassman says: “Traditionally, a low-cost option has been for one spouse to remain in the family home as - apart from minimising disruption, particularly where children are involved – it will avoid some legal, mortgage and property transaction fees.

"But the spouse who stays will usually have to find the money to buy the other’s share of equity and, if they can’t draw on other assets to do so, the new interest rate environment could make it difficult for them to obtain the extra borrowing. The shared mortgage could be on a low-rate fixed deal with years to go, and the spouse who departs might feel aggrieved at having to borrow at sky-high rates to fund their new property.

“If there is no option but to sell the home, in a weakening property market that could mean having to accept a lower offer than envisaged – and it could also mean having to pay an early repayment charge if the mortgage was fixed. Each partner, with their share of the equity, will then be faced with the task of securing a new mortgage at elevated rates to buy their own property - although one party could feasibly port any existing fixed mortgage if the lender allows.

“With rates where they are, a single buyer might find they can afford less than they’d hoped, without moving to a cheaper area – and this will be especially the case for older borrowers who cannot keep costs down by extending the term beyond 25 - or even 20 - years.”

Divorce can sometimes require the transfer or disposal of assets and that in turn can have capital gains tax consequences – although the regime has recently changed for separating couples. Transfer of assets between spouses takes place on a ‘no gain, no loss’ basis for CGT purposes, so that no tax is crystallised on the transfer, with the receiving spouse effectively taking the other spouse’s base cost. This rule for spouses used to apply only up to the end of the tax year of permanent separation.

But since 6 April 2023 this treatment is 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.

Glassman says: “This will provide 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 a spouse who retains a share in the family home will be able to claim relief from CGT on any profits they make if the home is sold to a third party – even if they have since bought another home.

“These recent rule changes have made the splitting of assets potentially easier and fairer, but possible CGT pitfalls remain. While the spouse rules work on a ‘no gain, no loss’ basis, they do not extinguish the inherent gain within the asset. In order to understand the real value of their settlement under the divorce, the spouses will therefore need to understand the ‘net of tax’ position.”

Pensions are an area that can become a source of confusion and dispute at divorce, especially when one spouse has a much greater pension provision than the other. Pensions are often the biggest marital asset after property, and sometimes even the largest, making up 42 per cent of household wealth, according to the ONS.

It is estimated that anything between a third and two-thirds of divorcees do not discuss retirement savings and pensions as part of their settlement despite the impact that could have their standard of living as a single person.

Glassman says: “There are various ways of splitting pension assets, but the important thing is to have it on the radar and make sure pensions are valued properly and an informed agreement is arrived at before the financial settlement – a process that can often require financial advice. Because once the court order is made, it is extremely difficult to alter the settlement.”