Each year, January sees a spike in the issuing of divorce petitions. In fact, the first working Monday of the New Year is often referred to as “divorce day”.
Anecdotally this is the day in the year when family lawyers received their most queries, but in reality, there is a number of factors that go into the rise in divorces at this time of year, not least struggling through the Christmas break with a dysfunctional family.
Experiencing a divorce can be an emotionally fraught time, but on top of this couples need to consider an eventual financial settlement, which carefully and fairly distributes wealth.
Many factors can go into the separation of a couple’s finances, including considerations regarding children, the earnings of each spouse and the assets they hold.
Some of the financial impacts include:
- Separation of assets and wealth
- Potential Capital Gains Tax liabilities from the sale or transfer of properties, investments and other assets
- Pension sharing agreements
- Legal fees of up to £400 per hour
- Average divorce costs of £14,500
We are yet to see the latest official data from the Office for National Statistics but a surge in divorce rates is expected due to the challenges the pandemic has brought, to our financial, work and family lives.
In fact, according to one of the UK’s largest family law firms, divorce enquiries rose by 95 per cent last year.
No-fault divorce
Traditionally divorce has been seen as a blame game, due to the requirements to find one of five grounds for divorce, which range from the ambiguous unreasonable behaviour to the more clear-cut abandonment after five years or adultery.
All this is set to change this April, as the long-awaited no-fault divorce rules are finally implemented by the Government.
The Divorce, Dissolution and Separation Bill, which introduces no-fault divorce, will keep the sole ground of irretrievable breakdown of the relationship but it removes the requirement to establish one or more facts to prove irretrievable breakdown.
The new rules will also update much of the archaic language used within divorce proceedings so that it is easier for couples to understand and deal with the process.
Under the new law, separating spouses will also be able to jointly apply for a divorce order where the couple both agree that the relationship has irretrievably broken down – further reducing the need for conflict.
Where one party wishes to bring an application for divorce this will also be permitted via a sole application even if their spouse or civil partner does not agree.
This will be sufficient grounds to prove that the marriage or civil partnership has suffered an irretrievable breakdown, which means the ability to contest a divorce, dissolution or separation will be abolished.
This change is significant and could lead to a further rise in divorces, which may in turn create new financial challenges for couples.
A fair separation of finances
Divorce settlements in the UK typically aim for a 50/50 split of assets and finances, including property.
However, this split may be affected by other circumstances that arise, which may mean that one spouse receives a large share.
When making a financial settlement, the Courts must consider several factors included in the Matrimonial Causes Act 1973 and the Civil Partnership Act 2004.
Among these factors are the income and financial requirements of each spouse, alongside the wider needs of the family, including maintaining a sufficient standard of living.
Where one or both parties to a divorce have a significant, long-term earning potential this will be accounted for, alongside the couple’s property and other assets.
This is then compared to the financial responsibilities that each party has, and the contributions already made during a marriage.
This can include financial contributions, or other elements, such as childcare provided by one of the parties and their support of the household.
In some cases, where the conduct of one party has been so severe as to fundamentally affect the life of their spouse, this may be taken into consideration. However, this does not typically include acts such as adultery.
These days the courts like to see couples have tried to resolve their differences through mediation and arbitration, where possible, and that each party is trying to achieve self-reliance.
Healthcare, childcare, or other financial responsibilities will be taken into consideration at this point.
The Capital Gains Tax trap
Many couples who divorce decide to sell or transfer the family home or other properties or investments to one of the spouses so that they have the finances necessary to purchase new individual properties for themselves.
However, in doing so many are unfortunately caught out by a Capital Gains Tax (CGT) trap. Prior to divorce spouse are treated as living together for CGT purposes, unless separated under a court order or formal deed of separation.
If the relationship has not broken down but the spouses live separately, they are still treated as living together for CGT purposes with one of the residences classed as the main home. If they were to sell this property they would, in most cases, be entitled to Private Residence Relief (PRR), which means no CGT would be due.
However, when a couple separates or divorces, each former spouse is treated individually for CGT purposes and must pay tax on their own gains.
Typically, one of the parties leaves the marital home, at which point it is no longer classed as their main residence.
At this point the clock begins to run on that party’s final period exemption. They will be under pressure to sell the family home within nine months so as to retain PRR.
Unfortunately, it has been known for the party remaining in the home to put off the sale of the home so as to apply further pressure on the departing spouse.
Even where there is no malicious intent, given the length of time it can take to sell a house, couples may be forced to continue living together even though the relationship has ended, and one party may still be stung with CGT costs.
In addition, if either spouse buys another property while the family home remains their main home, they will be required to pay the three per cent stamp duty surcharge for additional homes.
Given the challenges of home sales during a divorce, some couples may be able to agree to share any CGT liability, but this is not often the case.
Overlooked pensions
According to a survey of Which? members conducted at the end of 2021, only 15 per cent of divorcing couples include pensions in their financial settlement.
However, under the law, divorcing couples can be required to share pensions within the terms of a financial settlement.
Unfortunately, few consider this valuable asset during their settlement, even though it can make up more than 40 per cent of total household wealth.
In fact, of the 115,000 divorces each year only 28 per cent include pensions, with women preferring to secure the family home over their partner’s pension.
The same survey by Which? Showed that almost 60 per cent of respondents hadn’t even discussed pension arrangements during their divorce.
Not including a pension in a financial settlement could be financially disastrous for a spouse with little or no retirement provision, which is most likely the wife.
How devastating? Well according to a recent study by the University of Manchester shows that the average married woman aged between 65-69 has just £28,000 in pension wealth, whereas the average man has almost ten times that amount.
Splitting pensions can be a complex undertaking, particularly if the better-off spouse is not transparent about the value of their pension pot.
Anyone concerned that a spouse is hiding savings or assets should consider engaging a forensic accountant, who can uncover and help to consider previous pensions and other savings that might have been ‘forgotten’.
The cost of divorce
According to a recent study the average cost of divorce in the UK is around £14,500 plus VAT. This amount includes the legal fees and associated lifestyle costs.
Legal fees vary from one firm to the next, depending on the complexity of the work and the seniority of the solicitor, but they can be as much as up to £400 per hour or more.
However, in some cases a divorce can be concluded with minimal advice from a solicitor, with some couples going it entirely alone using the Government new online divorce service.
Another way to reduce the costs of divorce is to avoid court where possible. As mentioned, mediation and arbitration are a popular method of resolving a divorce and subsequent financial settlement and the costs associated with this can be considerably less than taking matters before a judge.
A divorcing couple will need to consider the costs of their divorce and should do their utmost to keep them down.
It is common for a couple’s savings and finances to be significantly depleted where a divorce becomes highly acrimonious and disputed.
Seeking financial advice
Given the complexity and potential pitfalls of a divorce it is important to seek financial advice, and update or develop your Life Wealth Plan.
To find out how the experienced team at Lamont Pridmore can assist you, please contact us.