Article contributed by Evelyn Partners, Financial advisers in January 2025.
Strains on relationships can grow during the festive season leaving some marriages or civil partnerships starting the new year at breaking point. The breakdown of a marriage is a challenging, emotional time, and it can also have a significant impact on your finances. Our advice is to tackle financial issues early and head on to avoid adding further grief to the process.
In reaching a financial agreement, a court usually considers a 50:50 split as a starting point for a marriage of more than five years as set out in the Matrimonial Causes Act 1973. This covers property, pensions, savings, and any child maintenance.
It is not always possible or practical to split every asset down the middle. Furthermore, each asset is not always equal based on current values. For example, £10,000 in a tax-effective wrapper like a pension or ISA has a higher after-tax value than the same amount in a taxable investment or savings account.
The biggest legal bills generally occur when there is a dispute over the financial settlement.
Here are three key financial considerations if you’re considering divorce.
Splitting the family home
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.
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 isn’t a viable option, we can help you understand what you can afford which will prevent future financial problems and help your family move forward in life.
Don’t underestimate the true value of pensions
Pensions are an area that can cause confusion and dispute during a divorce, especially when one spouse has a much greater pension provision than the other. They should not be overlooked as they are often one of the biggest marital assets alongside property, making up 42 per cent of household wealth, according to the ONS1.
It’s crucial to accurately value and understand the implications before a financial settlement is agreed. Once the final order is made, it is extremely difficult to change. Financial advice should be sought when valuing and deciding on how to split a pension.
State pensions are also important to consider. The state pension entitlement will be impacted for those that have gaps in their working life e.g. to raise a family. It’s important to obtain a projection, particularly when looking to equalise the pension entitlement between spouses. The value of a guaranteed, inflation-linked income from age 66 (currently) until death is not to be underestimated.
Consider the tax implications of a financial split
Asset values understandably garner most of the attention when discussing a financial settlement, but the tax position of each asset is arguably just as important. Whoever ends up with the asset is going to have to deal with the tax consequences at a later date, so it’s vital to understand the full picture.
Inheritance tax (IHT)
In the October 2024 Budget, the Chancellor announced that as of April 2027, pension pots should form part of an estate for inheritance tax purposes. There is currently a consultation period underway in respect of the changes. As such, careful attention should be given to ensure pensions are split in a way that takes into account their true tax position.
This may well require a big rethink for those preserving money in pensions and could lead to changing preferences over how assets are split among the two parties in a divorce.
Capital gains tax (CGT)
Divorce often requires 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. This means that no tax is crystallised on the transfer, with the receiving person taking the base cost of when the asset was initially acquired. From 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. Note that the rules do not remove the inherent gain or loss on the asset.
This change provides couples with more time and flexibility to arrange their financial affairs under the settlement. Changes to the rules around private residential relief also means 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.
A financial adviser can assist in helping you understand the real value of your ‘net of tax’ position and empower you to make informed decisions about your assets and finances moving forward.
Working alongside solicitors, a financial planner looks at the life-long implications of decisions made after a divorce. They will talk to you about your income 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.
When it comes to navigating a financial split, we are here to help.
Sources
1 GOV.UK, Family Court Statistics Quarterly, September 2024
2 Office for National Statistics, Household total wealth in Great Britain, March 2020