Taxation – Divorce

Taxation – Divorce

This article is a very basic overview of divorce and financial settlement.

Divorce is never pleasant, because a relationship that has broken down suddenly turns into disagreements about money – in particular the house and pensions, because in most cases they represent the bulk of the couple’s wealth, and are illiquid.

IMPORTANT – you will save yourself much time and aggravation (and legal fees) if you reach an amicable agreement, which both of your lawyers agree is fair and reasonable.

If you cannot agree, then it will be down to the courts. The courts have wide powers to decide what a fair division of the assets is. In theory they start on a 50/50 split but can take all sorts of things into account.

Suggested process (if you are still talking to each other) – Agree on a financial adviser and ask them to do a financial analysis of your assets, incomes, pensions etc, and give them the remit of making financially fair (though inevitably painful) suggestions. Hopefully your legal advisers can simply verify the fairness of the suggestions, or at least use the information as an agreed basis on which to do their work in more complex cases (e.g. those involving children).

For example the adviser might raise two equally fair options – one where the wife takes the house, most of the liquid assets, and the husband keeps the pension. The other where the husband’s pension is split, the house is sold and the liquid assets shared. If the husband has a good income and can buy a flat, and wife loves her garden, the first might make sense. On the other hand, if the house is too large for one person, and the wife is worried about retirement prospects, then a house sale with pension split might be the way to go.

As a very broad generalisation there are three types of divorce.

Wealthy couple

The couple is rich enough for both sides to part and maintain lifestyles, even with an uneven capital settlement. If you fit this category then recognise that going into courtroom battle will be about personal matters more than financial ones. Such personal issues may be justified, but are beyond the scope of this article.

Comfortable / professional couple

Likely to have equity in their own home and, as a couple, have an acceptable lifestyle.

However the financial balance is often one sided, especially with long married couples aged 40+. In particular salary and pension rights often favours one partner over the other, especially if one took time out from their career to look after the children.

In these cases asset and pension assessment is vital because most of the assets will be the house and pensions, and if the house can’t, or shouldn’t, be sold (e.g. there are children whose lives should be disrupted as little as possible) any fair settlement will be a matter of juggling the various assets and pension rights.

Ideally you should ask your financial adviser to look at all the issues and suggest a number of fair options, (all of which will look painful). With good guidance you’ll find that one or more of the options manages to avoid interfering with the pensions (eg the pension-rich spouse lets the other have more of the house/investments). For the sake of simplicity, if you can avoid involving pensions (while retaining fairness), use one of these options.

Asset poor couple

In these cases the pensions may well be the largest assets involved, and it will be impossible to reach a fair settlement without pension sharing/splitting.

The detail of pension sharing/splitting can get very complex, and is beyond the scope of this article. But the general rule is – if your advisers (financial adviser plus each side’s lawyer) can work out something they agree is fair, this may be an appropriate way to proceed.