Financial considerations you’ll need to make in separation or divorce

Article written by Kellands Hale, our preferred independent advice firm.

This article is not intended to be financial advice to any individual. The views expressed are those of the author and Moneyfactscompare.co.uk does not endorse the content.

Financial discussions often get lost in an emotional divorce or separation. While this is understandable, it might have serious ramifications down the line.

This is because sorting out your finances can become more complicated once you assess your relationship. For example, did you own a house together? Did you hold joint bank accounts? Who was responsible for household bills?

Once these discussions begin, it can be difficult to come to a resolution, especially if you wish to avoid legal action. Discuss

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

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

This is according to St James’s Place, a UK investment company, which also noted that your combined pension pot is 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 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.

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.

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 in the future.

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

While your pension is likely to provide either an annuity or simply grow in value over time, the housing market isn’t 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 is important.

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.

While it might not appear significant in the short-term you could be mistaken.

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.

This means you could both pay increased CGT if your assets aren’t shared tax-efficiently before you separate.

For example, your family bought a second home five years ago. Since then, it has appreciated in value and will earn a profit now that it will be sold as part of the divorce. However, your spouse owns a larger portion of the home and is willing to sell some of their equity to you to make it an equal split.

If this sale is made before separation, no CGT will be applied as the sale would be known as a “no gain/no loss” transfer.

Make this sale after your separation, and suddenly your partner may be liable for CGT on their profit.

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 separate, enabling both parties to feel financially satisfied during a difficult time.

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 blog 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.

© Kellands (Hale) Limited is authorised and regulated by the Financial Conduct Authority. FCA Firm Reference No. 193498