If you have read some of my other columns you’ll be aware that I do try to inject some levity into otherwise fairly dry proceedings to make the subject a little more relatable.
This is especially true where people have to contemplate their own mortality for the good of their loved ones. Sometimes a little gallows humour can break the ice and help people address uncomfortable issues.
This is obviously even more difficult though where divorce is concerned as the potential beneficiaries of your astute financial planning may not be quite so beloved. Tammy Wynette (the queen of divorce) was five-times D.I.V.O.R.C.E.D. Nevertheless, it is still extremely important to consider the financial implications of separation, and, as far as emotionally possible, act to mitigate needless tax and trauma.
So, bearing all this in mind, here’s my D.I.V.O.R.C.E. checklist:
Legally married partners enjoy significant tax advantages…..which disappear upon divorce
The major tax issue associated with separation tends to be Capital Gains Tax (CGT) rather than income or inheritance tax. This is because legal partners can freely transfer assets between each other free of CGT. This “perk” though stops at the end of the tax year in which a couple separates.
PensionMan Top Tip!
Many people assume that the exemption from CGT ends only with the decree absolute. That is not the case. Indeed you sometimes see separated, pre-divorce couples getting back together briefly if they are intending to transfer major assets with significant unrealised capital gains.
Some issues to consider regarding property and the family home
As ever property is a special case and there is a temporary exemption from Capital Gains Tax if the family home is sold within 18 months of one spouse leaving. However, if the transfer occurs any later than 18 months, and it is not directly related to a court order, you could incur an unwelcome tax charge.
There is also a Stamp Duty exemption where land or property is transferred due to a divorce or dissolution of marriage.
PensionMan Top Tip!
The unfortunate thing about the stamp duty divorce exemption is that it often only applies where a property is purchased as the result of a court order. Typically this would discriminate against a couple who attempt to settle things amicably (i.e. without going to court) and one partner agrees to move out of the marital home and purchase another property.
Don’t forget about pensions
A house is pretty difficult to ignore, but sometimes pension assets can be overlooked when a couple divorces. Whilst houses are often jointly owned (although that’s another story I’ll get to in a moment), a couple’s pension assets tend to be less equally divided.
Stereotypically this might be due to a wife taking a career break to raise the children. In so doing both her private and state pension entitlements will likely suffer (see my separate article on how to top up the state pension).
There are three ways in which pensions can be shared upon divorce:
1) Offsetting: Put simply the partner with the bulk of the pension assets transfers other assets to their former partner to “offset” the pension benefit.
2) Earmarking: Again the pension remains intact, but some of the benefits are “earmarked” for the former spouse.
3) Pension sharing: In this scenario the pension is split and both parties are free to make their own arrangements. This requires a court order and high quality financial advice.
And don’t forget to update your will!!!
PensionMan Top Tip!
It is a common misconception that wills are nullified upon divorce. They are not!
If you don’t change your will following your divorce you could easily find your assets being distributed to your former partner upon your demise. Worse still, should they pre-decease you, their new family could receive at least a portion of your estate.
This brings us to something I alluded to above. How you and your former partner own any jointly held property (again typically the former marital home) is of crucial importance. A married couple usually own their home as Joint Tenants, which is perfectly fine for the majority of people. Basically you both have a 100% interest in the property. However, when one of the Joint Tenants dies, their “share” passes automatically to the surviving Joint Tenant/s. Crucially this is irrespective of what you put in your will.
Thus it could be that, upon your death, your interest in the property passes automatically to your ex-partner, which is very likely not what you would ideally choose (to put it mildly). It could even end up with their new partner/children if your ex-partner is already dead. Your own children might not get anything, at least not from the house.
A more appropriate form of ownership in such circumstances might be Tenants in Common. Here you own a discrete share, say 50%, of the property which is yours to leave to whomever you stipulate in your will. It is also relatively easy to switch from Joint Tenants to Tenants in Common and, importantly, it doesn’t require the consent of your ex-partner.
If you have to separate, do so as soon after the start of the tax year as possible
Ideally April 6th! There are numerous advantages to finalising any settlements by the end of the tax year in which a couple separates (and not the year of decree absolute). Because of this, starting as close to the beginning of that year gives you the maximum period to make your arrangements.
And finally, a couple of words of warning
It is especially important to keep track of jointly owned assets and liabilities during the divorce process. You would not, for example, like your soon-to-be ex-partner to quietly remortgage the family home or to clear any jointly held bank or savings accounts.
Bank accounts are tricky as banks are notoriously obtuse when it comes to personal trauma. You can, however, register your interest in a property so that you will be notified if anyone attempts to sell or mortgage it. The following link shows you how it works and allows you to sign up quickly and easily.
Incidentally, this is also highly recommended for properties you let out to tenants. Signing up to this government scheme will prevent an unscrupulous tenant from representing themselves as you and mortgaging, or worse still selling, your property without your knowledge.
Take care out there