Three essential financial elements of divorce to discuss as early as possible

If you’re married, divorce is a subject that you likely don’t want to think about on a regular basis. After all, the process of divorce is emotionally draining, life-changing, and often expensive too.

Nevertheless, divorces are increasing. FTAdviser reports that, according to the Family Court, the second quarter of 2022 saw a 22% uptick in divorce applications compared with the previous year, with the third quarter seeing an 8% rise too.

Indeed, since the Divorce, Dissolution and Separation bill (also known as the “no-fault divorce bill”) was passed in 2022, it is now easier for couples to divorce without blame on either side. This might have contributed to the rise in divorce applications – although other factors, including the Covid-19 pandemic and the cost-of-living crisis, might also have put strain on marriages.

If you and your spouse enter divorce proceedings in the near future, it is important to know what to cover, especially when it comes to your finances.

Often, financial conversations can get lost in the wave of emotions divorce can bring. This is understandable, but might have serious ramifications down the line.

So, here are three financial elements of divorce to discuss as early as possible.

1. Pensions

You might be surprised to learn that, of the more than 600,000 couples who divorced between January 2016 and August 2022, less than 1 in 8 split their pension assets, PensionsAge reports.

As a couple, your combined pensions are often the largest investment you share aside from your home. Leaving pensions out of the conversation when splitting your finances could leave one person with far more wealth than the other after divorce, and may have an impact on both your future lives.

This is especially pertinent if one person is the “breadwinner” of the marriage, while the other gave up a career to raise the family. One may have significant pension savings, while the other may have many fewer assets to their name.

In any case, discussing your pension as a “big ticket” asset, in much the same way you would a family home, could be an important step.

No matter your circumstances, having a conversation about your combined pension wealth early on in the divorce can be helpful. Your Kellands financial planner can sit down with one or both parties and:

  • Discuss the current value of all pensions you hold
  • Produce a Pension Sharing Report
  • Help you set up a pension to receive a share.

All in all, talking about retirement funds early on in your divorce, with the help of a Kellands financial planner, might help achieve the best outcome for all involved.

2. Your family home

Of course, your family home is a huge factor when it comes to sharing your wealth in a divorce. Especially if there are still children living at home, often one spouse will opt to keep the house, and the other may take other investments instead.

While this arrangement might seem easiest at the time, it could lead to financial inequality between you both down the line.

Imagine that you opt to take your combined pension pots during a divorce, while your spouse keeps the family home. The two hold around a similar value, so it seems like a fair split.

While your pension is likely to provide either an annuity or simply grow in value over time, the housing market is not as reliable. These assets might be equal in value for now, but the opportunities for gains from each will fluctuate over time – perhaps unequally.

So, it may be wise to discuss the following as early as possible:

  • How the family home makes up a part of your larger asset portfolio
  • How to tax-efficiently sell the home, split it equally, or organise a buy-out
  • Who would benefit from remaining in the family home, if anyone, after you divorce.

The family home may be an emotionally significant asset for both of you, so taking your time over this discourse is important.

A Kellands financial planner can help mediate these tough conversations.

3. Capital gains

As you may already know, you may pay Capital Gains Tax (CGT) on profits made from selling assets, including:

  • Properties that aren’t your main residence
  • Non-ISA shares
  • Vehicles that aren’t your main vehicle
  • Art
  • Jewellery
  • Most other assets worth more than £6,000.

You might be wondering: “why do I need to discuss CGT with my spouse when we decide to divorce?”

Usually, couples can still transfer wealth between each other tax-efficiently until the day of the decree absolute, meaning the day on which the divorce is official. This often gives couples a chance to organise their affairs during the separation period.

However, when it comes to CGT, the date on which you can no longer share assets tax-efficiently is the day of separation, not once your marriage is officially dissolved.

So, if you decide to separate as a couple and apply for divorce, it is of paramount importance that you discuss the CGT implications of your split before you do.

Although it can be difficult to prioritise financial conversations in an often-emotional time, you could both pay increased CGT if assets are not shared tax-efficiently before you separate.

Here’s an example.

Your family bought a second home five years ago. Your spouse owns a larger portion of the home than you do. Since you bought the home, it has appreciated in value, and will earn you a profit if you decide to sell.

Before you separate, you are entitled to share assets between you, with no additional CGT charge applied. This is known as a “no gain/no loss” transfer, and means spouses can often give each other assets tax-free.

However, once you have separated (even before your divorce is finalised), the no gain/no loss basis no longer applies.

So, if your spouse sells you a portion of your second home in order to make it an equal split upon divorce, they may pay CGT on the profits they earn – even if your divorce isn’t final yet.

That’s why, if you decide to offload assets when you divorce, discussing these early on with a Kellands financial planner may be a beneficial move. We can help mitigate your tax liability before you actually separate, enabling both parties to feel financially satisfied during a difficult time.

Get in touch

We understand that divorce can be a strenuous process – and that your wealth may be the last thing on your mind when it happens.

Working with us could bring you peace of mind, and may help reduce your stress when going through a divorce. Email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All contents are based on our understanding of HMRC legislation, which is subject to change.

 

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