Following a surge in applications for divorce last year, Evelyn Partners has urged separating couples to address financial issues early in the process.
The first Monday in January is known as ‘divorce day’, given the uptick divorce lawyers see in enquiries after the Christmas period.
Evelyn Partners, previously known as Tilney Smith & Williamson, has appealed to divorcing couples to be cognisant of the key issues that arise in divorce particularly around pensions, property and tax.
This year, property is a particularly important asset to consider as the rising interest rate environment may change what is affordable for a newly single individual.
Against a backdrop of pandemic and lockdown stresses being replaced with financial and cost of living pressures, 2022 saw an increase in the numbers applying for divorce.
According to statistics from the Family Court, the second quarter of the year saw a 22 per cent increase in applications compared to the same period in 2021, while in the third quarter there was an 8 per cent increase.
Evelyn financial planning partner and head of family and divorce, Ben Glassman said this rise may be in part due to the introduction of the no-fault divorce bill last April.
The bill aims to reduce the potential for conflict amongst divorcing couples in England and Wales by removing the ability to make allegations about the conduct of a spouse and allows couples to choose to jointly end their marriage.
“It now seems very probable that some parties who had split on good terms in 2021, were probably holding off petitioning for divorce and have waited until the legislation came into force before making an application,” Glassman said.
Before the introduction of the bill, couples had to give adultery, unreasonable behaviour or dissertation as a reason for divorce or show that they were living apart for two years by agreement, or five years if one party did not want the other party to go.
“It is to be hoped that a less confrontational system will allow crucial decisions on things like finances and allocation of assets to be made with more clarity and to achieve more beneficial outcomes,” Glassman said.
“Although as the law change eases the practicality of divorce, more couples in the short term at least might be expected to formalise their separation,” he added.
Evelyn Partners outlined a number of the key issues that couples need to consider during the divorce process.
Splitting assets
Across the board, a court usually considers a 50:50 split as a starting point when reaching an agreement on assets if the marriage was one of more than five years. This covers property, pensions, savings and any child maintenance.
Try to be clear-headed about the family home
One spouse often wants to keep the family home when getting divorced, especially where there are children involved.
Glassman warned however that this does not always make sense, particularly when taken into context with other existing assets.
“Property is usually the biggest asset, and if one partner wants to stay in the family home, they will often have to forgo the majority of the other assets such as savings and pensions.
But he warned: “A property one lives in doesn’t produce an income and parts can’t be sold to meet spending.”
“Furthermore, 2022 saw the end of ultra-low mortgage rates. What was affordable for a family last year may not be so when one party needs to remortgage. So think about spending as a whole and not just the tenure of the matrimonial home, and if the family home is paramount consider the compromises this might result in.”
Be cognisant of capital gains tax regime change
Transfer of assets between spouses takes place on a ‘no gain, no loss’ basis for CGT purposes which means that no tax is realised on the transfer, with the receiving spouse effectively taking the other spouse’s base cost.
However, this special rule for spouses currently only applies up to the end of the tax year of permanent separation.
Glassman explained: “But under the new legislation, transfers of assets between ex-spouses on or after 6 April 2023 will be available for up to three tax years after the end of the tax-year of separation, or an unlimited time when the assets are transferred as part of a formal divorce agreement.
“Those currently separating who have a range of property or investment assets to divide might think about deferring their formal separation until after April to take advantage of this more flexible regime.”
The importance of pensions
According to Glassman a pension can be one of the biggest financial assets that a person has, so it’s important to take them into account when agreeing a divorce settlement – particularly in cases where both spouses are retired.
“We have seen the average age of a couple getting divorced rising, and alongside pension freedoms introduced in 2015 this has created a greater emphasis in recent years on pension assets in divorce settlements.
“When a couple is in their 60s, pension pots are likely to be at their greatest value, and the issue can become contentious when, as is often the case, one spouse (typically the male) holds the majority of pension wealth,” Glassman said.
There are various options for how pension assets can be allocated.
According to Evelyn Partners, the long-standing ‘earmarking’ option is where the non-pension holder receives regular payments – which will cease on the death of the former spouse - but the asset remains firmly in the hands of the pension saver, who will be liable for tax.
This has given way in many cases to splitting or offsetting the pension.
When a transfer happens, the non-pension holder is awarded a share of the asset and are no longer tied to the original pension holder.
When offset, a pension is offset against other assets which can often be complicated. This option is more usual among young couples, who will not have had time to build up significant pension savings.
However, according to Evelyn Partners there are some circumstances where giving up part of your pension could actually benefit one party.
For example, reducing a pension could bring an individual below the lifetime allowance limits, and avoid potential tax charges of up to 55 per cent being incurred in retirement. This could prove beneficial for those who have pension pots in excess of £1m.
The firm said it is important to bear in mind that following divorce, where an individual sees a reduction in their pension pot, it might prove difficult to rebuild, particularly if they have triggered the money purchase annual allowance.
Other assets
Similar to pensions, savings and investments are usually included in a divorce settlement.
In Scotland, it is usually only the savings and investments built up during a marriage that matter, whereas the courts in England, Wales and Northern Ireland generally take all of them into account.
Life assurance and maintenance payments for children are also important areas to remember as are wills and any business assets.
Glassman said: “Business owners often don’t realise that their ex – even one who has never been involved with the business – may be entitled to a share of the business on divorce. This can be devastating and have profound financial implications for business owners. Divorce can also lead to one party buying out the other.”
jane.matthews@ft.com
