How to split property and other assets in divorce

Some even set out prenuptial agreements from the outset.

Whilst no one enters a marriage expecting to separate, prenuptial agreements are an increasingly popular option for young UK couples.

And couples that amicably agree on how to split their money and property can usually avoid going to court hearings.

But it is not always straightforward or simple. 

Naturally, things can get messy once discussions about money enter the picture, especially if the couple has a history of not talking about their finances, or if one person has been managing the household’s finances for much of the time they have been together.

“On divorce or dissolution of a civil partnership, all matrimonial assets will be taken into account as part of any financial settlement,” says Nigel Cayless, associate director at Sackers.

“[But] for many people their pension will be one of their main assets… [and] how pension benefits are treated will depend on each couple’s individual circumstances and the other available matrimonial assets and debts.”

But if pensions are not part of the settlement, a spouse may well still want to change their ‘letter of wishes’ to their pension provider about who should benefit from their pension after their death.

Assets once held in inheritance tax-efficient wrappers, such as perhaps shares in companies listed on the Alternative Investment Market, and business assets may need to be realised to fund a house purchase and/or the divorce settlement. 

Homeowners are legally bound to their monthly mortgage payments irrespective of their marital situation, or otherwise may face arrears and fines.Louisa Sedgwick, Vida Homeloans

Agreeing on the division of assets allows arrangements to be made tax-efficiently between the parties, a lower overall tax bill means both parties benefit, but if it is left to the court, a tax-efficient division of assets may be more difficult to achieve.

Often, negotiating a settlement with a former spouse is likely to cost you less and can be far more tax-efficient in the long run than disputing arrangements through the courts.

Sharing property

“With 42 per cent of marriages ending in divorce, it has unfortunately become a common lifetime event which impacts both parties and their wider families, especially in more difficult scenarios where couples are unable to agree on who owns what,” says Louisa Sedgwick, director of sales and mortgages at Vida Homeloans.

She adds that such circumstances can often lead to financial difficulty as legal bills and other expenses accumulate.

Indeed, she notes: “Homeowners are legally bound to their monthly mortgage payments irrespective of their marital situation, or otherwise may face arrears and fines.”

And when it comes to credit scores, divorced couples on a joint mortgage could see their credit scores impacted if the mortgage is not paid, resulting in potential difficulty obtaining credit in the future, suggests Ms Sedgwick.

She says: “[So] many divorces see the higher earner committing to support the other persons living costs by means of maintenance payments, which need to be taken into consideration when applying for a new loan. 

“This has the ability to impact affordability and eligibility, potentially limiting the chances of being accepted for credit.”

But she says the specialist lending market can play a vital role for borrowers in these circumstances, where creative and innovative solutions are making a difference to divorcees' needs. 

For example, she says there exist products aimed at parents or grandparents helping their children get onto the property ladder, but that these also provide a way for parents to help their children after a major life event such as divorce. 

She says such lending products – for example, she cites Vida’s Helping Hand product – have “helped many divorcees stay in their marital home when they perhaps wouldn’t have been able to afford the mortgage after their partner has left the property”.

Additionally, clients can register their home rights with HM Land Registry, which essentially blocks their ex-partner from selling the family home.

However, your client cannot apply for home rights if their spouse or civil partner owns the property with someone else unless their spouse or civil partner would get all the money if the property was sold to become the ‘sole beneficial owner.'

Capital gains tax and other assets

While gifts between spouses are exempt from IHT, a transfer after a divorce may cause IHT issues.

Also, family business interests may need to be restructured to allow one spouse to exit: the cash the leaving spouse receives will be liable to IHT on death unless reinvested in new qualifying business assets. 

But clients will usually not have to pay capital gains tax – a tax on the profit after something is sold that has increased in value – on the assets they give to their husband, wife or civil partner.

However, they have to pay capital gains tax on assets transferred to the ex-partner after the relationship ends. 

Such assets include shares, certain personal possessions and property; but it is worth noting that clients will usually not have to pay tax if they transfer or sell their main home.

It is possible, though not guaranteed, to exclude some assets from being shared if a spouse had them from before they got married, if they got them after they separated, or if they were inherited, according to Victoria Walker, family solicitor and partner at Moore Blatch LLP.

She explains: “Whether these assets are shared very much depends on the size of the marital pot.

“In simple terms, if it is £10m then these assets will likely be excluded. If it is more like £100k then those other assets may need to be shared.   

“The court can make an order for a lump sum, it can order the property to be transferred, it can order pensions to be shared, and it can order maintenance payments.” 

She continues: “For maintenance payments, it is important for a spouse to do a good, well thought out budget of their monthly outgoings to ensure they get the maintenance payments they need.

Legal advice

Because the situation can vary case-to-case, it is paramount that clients are encouraged to seek a solicitor’s advice first, before going to an adviser for help with financial planning.

Typically, spouses that have been married for over 10 years share assets 50/50.Victoria Walker, Moore Blatch

“Spouses that have little or no understanding of the matrimonial finances are at risk of losing out, as if one spouse is oblivious to certain assets, it becomes much harder for their legal team to achieve a fair settlement,” says Ms Walker. 

“[But] if a spouse is involved in the family finances, then coming to a fair settlement becomes much easier.   

“Importantly, struggling to pay legal fees should not be a barrier to getting good legal advice.”  

She continues: “If one spouse cannot afford the fees, then it is possible to get the other spouse to pay or there is litigation funding available.

“It is always advisable for anyone facing divorce to see an IFA at the start of the divorce process, so they can know what they want to achieve and instruct their legal team.”

She adds: “Then a new divorcee should see their IFA at the end of the process to plan for what they want to do with those assets.  

“Typically, spouses that have been married for over 10 years share assets 50/50.”  

victoria.ticha@ft.com