Get your fair share when you split
With around 40% of marriages ending in divorce, knowing your rights and how to ensure you emerge with your finances intact is essential.
"I'm sure fewer people would get married if they understood the commitment they were entering into," says Jill Goldman, partner at Thomas Eggar. "Unravelling a marriage can be very complex."
Probably the simplest part to sort out is ongoing maintenance for any children. The Child Support Agency has guidelines in place and, although you can make more generous arrangements if you prefer, if there are any disputes the maintenance will always revert to the levels that have been set.
Unfortunately though, there isn't anything concrete in place regarding how other assets and spousal maintenance are determined. Assuming there's no prenuptial agreement in place, anything owned at the time of divorce is taken into account regardless of whose name it's in.
"If you bought a house before the marriage you might have grounds to keep that, but in the main the division of assets will be determined by the needs of both parties rather than what they brought to the marriage," says Goldman.
As an example, if one party has been the main breadwinner while the other gave up a career to look after the children, the assets might be shared equally, although the breadwinner has contributed more financially. The length of the marriage may also be taken into account.
With a shorter marriage, courts are more likely to consider what each party brought to the marriage. "There's no magic formula," adds Goldman. "But if they've been married a long time a straight 50:50 split is much more likely."
In addition to dividing up assets such as investments, property and belongings, pensions often become part of the divorce settlement, especially as these can be one of the largest matrimonial assets.
There are three approaches available, as Caroline Wright, a solicitor at Boodle Hatfield, explains:
"Offsetting, where one party keeps the pension in exchange for other assets, and pension attachment orders, which sees the pension scheme paying part of the pension to the other party once it becomes payable, are options, but pension-sharing orders are generally seen as the solution to most difficulties."
With a pension-sharing order, part of the pension is transferred to the former spouse, which they can then put into a pension of their choice. This means there can be a clean break, as there's no need to wait for the former spouse's pension to become payable.
"You have control over your pension," adds Wright. "With a pension attachment order you could find your former spouse failing to maintain contributions, which will reduce your pension income, and the income would also die with them."
Given what's potentially at stake, advice is critical. A pension adviser, who could be a specialist financial adviser or actuary, will assess the scheme or schemes in question, looking at guaranteed annuities and other pension benefits as well as the transfer value.
Carol Ellinas, partner at law firm Winckworth Sherwood, adds: "A 50:50 split isn't always the best. Because women live longer they receive smaller annuities, so you'll need to adjust the split if you want to achieve parity of income."
You can also expect a charge from pension scheme trustees if you split a pension. Generally, these are between £500 and £1,500, although Ellinas says she knows one that charged £15,000 to arrange the split.
Other asset division
As well as looking at how to divide matrimonial assets, it's also important to consider when the assets are divided. "You do need to be careful," says Ronnie Ludwig, partner in the private wealth group at Saffery Champness.
"Once you have separated you can only transfer assets free of capital gains tax in that tax year. After that you could unwittingly make the taxman the third party in the divorce."
The family home usually causes major problems from a tax perspective. Although the rules give a CGT exemption to the person moving out, if they buy another home this exemption is reduced to the time they have lived there plus a further three years.
As an example, take the Smiths. Mr Smith agrees to move out of the family home, allowing his former wife and children to live there. They agree to split the proceeds of the sale after eight years when the youngest child is 18.
As he has bought another home, when the former home is sold he is only able to claim a CGT exemption for the time he lived in it plus a further three years.
So if the house was bought for £150,000 and sold after 20 years for £450,000, this would be an annual increase of £15,000, or £7,500 each. Mr Smith would face a CGT charge on £37,500 (five x £7,500). At a rate of 28%, this could mean a bill for £10,500.
Therefore agreeing a date of separation that gives you time to transfer any assets is essential. "Separating at the end of March gives you less than a week to avoid a tax bill; going for 10 April gives you almost a year," Ludwig explains.
Where it isn't possible to transfer assets and avoid a CGT bill, Ludwig suggests using a trust. "In the example used Mr Smith could settle his half share of the house in trust on Mrs Smith.
As long as she lives there the CGT exemption will be in place for the trustees who can pass the proceeds tax-free to Mr Smith when the house is sold," he explains.
"There are catches, but, as with other areas of divorce, if you plan in advance and get independent advice you can avoid the nastier pitfalls."
This article was originally published in Money Observer - Moneywise's sister publication - in August 2010
The cash equivalent transfer values (CETV) is an assessment of the total accumulated cash value of a pension you will be able to take out of your existing pension and move into a new one should you change employers or decide you want to move to a more flexible scheme with greater benefits and lower administration costs. The transfer value will depend on the trustees of the pension fund assessing your contributions and investment growth to determine the transfer value, which may have to be certified by the scheme’s actuary.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.