The cost of divorce – how the pain can be more than emotional
January has earned the dubious distinction of being the month when more couples decide they want to get divorced than any other. The reasons are likely to be myriad, but the likelihood is that they either mark Christmas or New Year as a line in the sand for changing their lives, or simply that spending so much time together during the festive season helps them realise they are no longer compatible.
One law firm has seen an increase of 150% in divorce enquiries this January compared to the surrounding months, possibly boosted by the fact that couples can now have a ‘no fault’ divorce in England and Wales – it was already available in Scotland – after new legislation came into force last April. But the emotional turmoil that divorce brings is only one source of pain, as the financial cost is also considerable.
What does divorce have to do with the taxman?
Splitting assets between couples who have had their lives intertwined for decades is a complicated business. Add into this the emotion involved in such splits and it becomes very difficult to deal with these issues amicably.
However, when it comes to splitting assets, there may be a tax implication depending on what you do and how you do it. For example, if a couple splits a pension pot – which is taken into account as part of the assets held by one or both spouses depending on their financial position – the way this is done could potentially be a benefit for one or both of you. If the pension itself is likely to breach the £1,073,100 Lifetime Allowance threshold, then splitting this could mean both parties are able to add more to their pension without breaching this limit.
However, pensions are often not split in this way. So, often there is an offset of other assets – one spouse may get the family home, for instance, and the other spouse may keep the pension intact. It all depends on the financial agreements you make in the divorce.
What else should divorcing couples consider?
The pension conundrum is definitely not the only issue for divorcing couples to consider when it comes to their finances. There could be Capital Gains Tax (CGT) charges to think about as assets are split between the two parties.
To be sure there is no CGT to pay on the transfer of assets between you, it would be best to transfer assets before you formally separate – as long as you lived together at some point within the current tax year, which runs from April 6 to April 5 the following year, you shouldn’t have a CGT liability on giving assets to the other spouse.
If you split assets after you have been separated and the divorce has been finalised, then there could be a CGT liability. You can find out more on Gov.uk and by speaking to your accountant.
There are other areas to consider too. For example, if you pay spousal maintenance after your divorce, you may be able to claim tax relief on this. Also, if you had a High-Income Child Benefit Charge while you were with your spouse, you may now be able to claim full Child Benefit. Again, more information is available or you can speak to your accountant.
If you are separating from your spouse or civil partner, then please get in touch with us and we can help you make the right financial decisions to keep your costs to a minimum.
March 6, 2023