Getting divorced? Here’s how to make a clean and fair financial break

Many married couples decide to split up and begin the process of dividing their financial assets in the New Year.

The first Monday falling on a working day in the new calendar year is dubbed Divorce Day because so many people choose then to start the formalities. This year, it falls next Monday, on 8 January.

Law firm Weightmans says the causes are Christmas stress, the financial pressures of the season, New Year resolutions to make a fresh start, and extended time together over the festive period prompting some couples to part.

‘No fault’ divorce legislation introduced in spring 2022 has made this simpler and speedier, although the emphasis on haste can risk costly errors.

After a brief spike in cases at the outset, the number of divorces appears to have settled back to the same rate as before, although there is evidence that financial pressures might be forcing some couples to delay making it official.

One in five recent divorces were delayed for money reasons, including concern about income, the cost of living and the cost of divorce, according to a survey of 2,750 divorced adults in November by Legal & General.

Below, we round up tips from money experts and lawyers on how estranged couples can divide financial assets fairly and avoid common pitfalls.

1. Family home

Property and pensions are usually a couple’s biggest assets, but the family home has more immediate emotional and practical importance, especially if they have children.

There are a lot of financial considerations too though when deciding how best to split ownership of a property.

‘If one partner wants to stay in the family home, they will often have to forgo the majority of the other assets such as savings and pensions,’ wans Ben Glassman, head of family and divorce at wealth manager Evelyn Partners.

‘Keeping the home doesn’t always make financial sense when taken into context with other existing assets. A property one lives in doesn’t produce an income and parts can’t be sold to meet spending.’

Meanwhile, he says higher mortgage rates have narrowed options for people who need to borrow to buy a new home after a divorce.

‘One spouse remaining in the family home – apart from minimising disruption, particularly where children are involved – 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 new interest rate environment could make it difficult for them to obtain the extra borrowing.’

Glassman also points out that a shared mortgage could be on a low-rate fixed deal with years to go, while the spouse who departs might have to borrow at inflated rates to fund their new home.

And if you have to sell, a weakening property market could mean having to accept a lower offer and having to pay an early repayment charge if the mortgage was fixed, he says.

Glassman suggests rather than both partners having to get a new mortgage at elevated rates to buy new homes, it is often feasible for one of them to port an existing fixed mortgage, and some lenders will let couples split and port a fixed rate loan.

‘With rates where they are, a single buyer might find they can afford less than they’d hoped, without moving to a cheaper area – and this will be especially the case for older borrowers who might find lenders less willing to allow monthly costs to be kept down by extending the loan term beyond 20 or 25 years.’

2. Pensions

Pensions are often neglected in divorce settlements despite their value to both partners as a joint asset in a marriage.

There are three main options when dealing with pensions in a divorce – sharing them on a clean break basis, one partner earmarking some of the income to be paid to an ex-spouse after retirement, and offsetting their value against other assets.

We look at the pros and cons of each option in detail in our guide to splitting pensions fairly in a divorce.

‘Only 12 per cent of financial orders on divorce contain a pension sharing order, and it remains all too common for parties, usually the wife, to ignore claims against their spouse’s pension or forego claims due to a desire to retain the family home,’ says Stowe Family Law partner Matthew Taylor.

‘While this can be a sensible approach, many fail to understand the true value of the pension share they are giving up, and women are at risk of trading a long-term guaranteed income for short-term stability.’

Taylor says the average disparity between men and women’s pension assets is 56 per cent, primarily due to women doing more part-time work and the gender pay gap.

Sarah Coles, head of personal finance at financial services firm Hargreaves Lansdown. says: ‘If your spouse has been building up a pension for years, pension specialists are particularly valuable.

‘You should get a pension valuation as part of the financial disclosure, and it may be worth paying an adviser to check the numbers. They can also help you pick the most appropriate way to share the pension.

‘After the split you also need to ensure you revisit your pension arrangements, and work out how you can undo some of the financial damage from the divorce.’

Glassman says: ‘Many divorcees who don’t take professional advice do not discuss pensions as part of their settlement and this can then lead to costly legal disputes at the eleventh hour as the financial settlement goes in front of a judge, or even after it has been made.

‘We have seen the average age of a couple getting divorced rising. When a couple is in their 60s, 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.’

Meanwhile, you should not forget to get a state pension forecast especially if you have gaps in your career that could affect your record, adds Glassman.

‘It’s important to obtain a projection, particularly when looking to equalise the pension entitlement of the two spouses. The value of a guaranteed income of £10,000 inflation-linked from age 66 (currently) until death is not to be underestimated.’

Glassman warns once the court order is made, it is extremely difficult to alter the financial settlement in a divorce.

Want more information on splitting pensions in a divorce? The Pensions and Lifetime Savings Association and Advicenow have free guides.

3. Capital gains tax

‘When you pass assets between spouses, you don’t trigger an assessment for capital gains tax,’ says Sarah Coles of Hargreaves Lansdown.

‘In the past, if the divorce carried over into a new tax year, you could end up with a tax bill. This has changed now, so that you won’t trigger a tax calculation if you transfer assets in the three years after you last lived together. After that, you could end up paying tax.’

This means you should not hang about for too long, and remember that there’s a ticking clock while you reach an agreement, she adds.

Ben Glassman of Evelyn Partners says the new rules on CGT and divorcees that came into effect in April 2023 mean the transfer of assets between spouses can take place on a ‘no gain, no loss’ basis for longer.

‘No tax is crystallised on the transfer, with the receiving spouse effectively taking the other spouse’s base cost.

‘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.’

‘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.’

Glassman says this gives couples more time and flexibility to arrange their financial affairs, but possible CGT pitfalls remain.

‘While the spouse rules work on a “no gain, no loss” basis, they do not extinguish the inherent gain within the asset. In order to understand the real value of their settlement under the divorce, the spouses will therefore need to understand the “net of tax” position.’

4. Keeping it amicable

‘You don’t have to stay friends, but the more you can reasonably agree between you, the less you’ll spend on lawyers,’ says Sarah Coles of Hargreaves Lansdowne.

‘This goes for the financial settlement, but also for arrangements for any children. 

‘When you do need to use lawyers, it’s even more of a reason not to let this become a prolonged row – because each niggle you argue over will cost a fortune in legal fees.’

But Coles also cautions: ‘Don’t let your ex use your efforts to stay on good terms against you. 

‘If they threaten to stop speaking, they demand more unless you agree, or they try to threaten you with things like access to children, then rather than being bullied into a poorer deal, your lawyer can take them on.’ 

5. Mediation

With family courts facing severe backlogs, couples can face a long wait for a resolution, warns Weightmans partner and family law expert Emma Collins.

‘Any divorce can come with disputes. This year, we’re urging divorcing couples to consider how they can settle any disagreements – whether that be about money, child arrangements or property – outside of the court.’

She says mediation and arbitration can therefore help resolve issues far more quickly, cheaply and harmoniously – she explains the difference between them below.

Mediation: This involves working with a trained mediator, who helps couples to identify lasting solutions to issues.

Arbitration: Families appoint a private judge to decide their case, but the process provides more flexibility and is quicker than standard legal proceedings.

‘Both parties will put their arguments to the arbitrator, who will then reach a decision. This will be binding, and subsequently recorded in a court order,’ says Collins.

‘If you’re not sure which option might be right for you, speak to a family lawyer.’ she goes on. ‘There are ways to make divorce as smooth and amicable as possible. Considering these options will help secure the best possible outcomes for all involved.’

6. Legal advice

‘A straightforward divorce may be something you can handle alone,’ says Sarah Coles of Hargreaves Lansdowne. ‘But if you have pensions, a property, significant savings and investments or children to consider, speaking to a lawyer and a financial adviser are the best ways to protect yourself from an expensive mistake.’

She warns: ‘If you need to talk to someone about the emotional upheaval, then make sure you’re using the right specialist for that too.

‘Talking through your anger with your lawyer is expensive, and they’re not going to be able to help as much as a counsellor might.’

It is usually best to find a lawyer via a personal recommendation. You can also use the search tool on the Law Society’s website – choose family and relationships in the drop-down box and input your location. 

If you can’t afford a lawyer, you can get help with legal fees in certain situations when you separate from a partner.

Details about the rules and a database of solicitors who might be able to help are on the Citizens Advice website.

Citizens Advice also offers suggestions on how to find low-cost or free – called ‘pro bono’ – legal advice. Your local branch can give you free, confidential, independent help on how to move forward.

Citizens Advice says that if you want to represent yourself, you can get advice on going to court without the help of a lawyer from Advicenow.

7. Financial advice

As mentioned above by Coles, getting financial advice can be helpful if you have property and other financial assets to divide up.

It’s worth considering doing this at an early stage, not waiting until after a settlement, to save money and avoid tax and making other errors during a divorce. 

However, becoming single again can also involve a ‘financial shock’, points out Ben Glassman of Evelyn Partners.

‘The financial implications of divorce are now particularly acute after a two-year bout of high inflation, soaring mortgage rates, and a lot of economic uncertainty that could still affect the jobs and housing markets.

‘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.’ 

8. Rebuilding your finances

‘You need to assess where you are and start rebuilding your finances as soon as you can,’ says Sarah Coles of Hargreaves Lansdown.

She suggests reviewing what you have in place, and making sure it still suits you.

‘If you have run up debts or spent your emergency savings during the divorce, paying them off and building three to six months’ worth of essential spending in an easy access account are the priorities. Don’t forget insurance too.’

‘If you’re relying on maintenance payments, you also need to insure the life of the person paying them, to protect your family from all eventualities.’

This post first appeared on Dailymail.co.uk