With January typically seeing a rise in the number of couples seeking to divorce following the festive period, couples should not leave financial issues to the last minute, says Evelyn Partners.
According to the wealth manager, navigating financial issues is an aspect of the relationship that can cause difficulty in the divorce process, so couples should address issues from the outset.
Ben Glassman, financial planning partner and head of family and divorce at Evelyn Partners, said: “Financial pressures can be a complicated dynamic for many couples: money worries can certainly add to the strain on a marriage, but for a few couples they can also weaken the motivation to separate. Some might delay separation because they do not want to incur the costs it entails and don’t like the look of solo life’s financial challenges.
“The ongoing elevated cost of mortgages, alongside the generalised increase in the cost of living in recent years, has made separation for some couples a trickier financial conundrum than it had been previously. For those who do decide to break up, the fate of the family home and the splitting of financial assets like pensions are often some of the most difficult issues to reach agreement on.”
The introduction of No Fault legislation in April 2022 has made the process easier for couples to part ways, prompting many to try and “DIY” the whole process. However, for couples to amicably agree on the splitting of assets, financial advice, particularly around pensions and other complex matrimonial assets, will be crucial, says Glassman.
“The financial implications are for some families more acute amid higher living and borrowing costs, and current economic uncertainty could still affect the jobs market. It is the case that living as part of a couple is usually cheaper and more financially secure 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. Nowhere is that more noticeable now than in regard to property, with house prices close to all-time highs and mortgage rates and rental costs remaining higher than they have been in many years,” explained Glassman.
The family home and mortgage costs
Property is usually the biggest asset and if one partner wants to stay in the family home, they will often have to forego the majority of other assets such as savings and pensions. However, higher mortgage rates have narrowed the options for those who need to borrow to buy a new home.
Glassman said: “One spouse remaining in the family home has traditionally been the low-cost option as 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 mortgage rate environment could make it difficult for them to obtain the extra borrowing.
“If there is no option but to sell the home, this could also mean having to pay an early repayment charge if the mortgage was fixed. However, it is often feasible for one party to port an existing fixed mortgage and some lenders even allow couples to split and port a fixed rate loan.”
Pensions
Pensions are an area that can either be overlooked or become a source of confusion and dispute during a divorce but they are often the biggest marital asset after property.
Glassman said: “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 are closer to retirement, 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.
“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.”
Evelyn Partners says splitting or sharing pension assets is much more complicated than for cash savings and will be influenced by the type of pension, the tax regime that covers pension access and the ages of the divorcing couple. A pension can also be dealt with by offsetting it against other assets, but this can involve complicated calculations as to the ‘real’ market value of the pension. As such, it might be a more usual option among younger couples who will not have had the time to build up significant pots.
Glassman said particular difficulties and confusion can arise over defined benefit pensions in a financial settlement.
“Even when a DB pension has been valued, the question remains as to how it might be shared or offset. These issues have been complicated still further by recent volatility in the bond market, as DB valuations depend in part on gilt yields. As these soared to their highest in 15 years last year, DB valuations have plunged and, in some cases, nearly halved,” explained Glassman.
Inheritance tax
The Chancellor’s recent announcement that from April 2027, pension pots will form part of an estate for inheritance tax purposes will change the landscape, says Evelyn Partners.
Glassman said: “This could require a big rethink for those preserving money in pensions for this purpose and could also lead to changing preferences over how assets are split among the two parties in divorce.”
Post-divorce, it is important that individuals update their Expression of Wishes/ Death Benefit Nomination form with each of their pension providers to ensure benefits are not left to the ex-spouse.
Capital gains tax
Divorcing couples will also need to give consideration to capital gains tax, particularly if the divorce requires the transfer or disposal of assets which have CGT consequences.
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. However, 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, providing 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.
Business assets
Business owners often don’t realise that their ex spouse may be entitled to a share of the business on divorce. The court takes into account all assets and is unlikely to make a distinction between business and other assets unless there is legal paperwork to show otherwise. In some cases, a family court may decide to break it up or sell it.
Wills
Divorcing couples must immediately update their will. Failing to do so could mean assets could pass to the spouse on death prior to the divorce being granted.
Glassman added: “Even where couples are truly amicable and wish to ensure their wealth is split in the fairest and most tax-advantageous manner, involving a financial planner can save substantial amounts of money. This is particularly true where there are significant pension assets involved. The new proposed rules on pensions and Inheritance Tax from 2027 make sound advice even more important.”
