Separation and divorce

Financial Settlement

Splitting up from a partner is a tough decision, which can have a huge impact not only on your private life, but also on your finances. The best way to ensure that your finances remain stable is to come to an understanding with your partner as to how to divide the family assets before the formal divorce or separation procedure starts. It may seem difficult, but a financial settlement with your spouse or civil partner will help both of you avoid a lengthy and costly court process. The basic rule is that urging the court to order the division of family assets must always be a last resort.

 

Reaching an amicable financial settlement with your spouse or civil partner is also the best solution with regard to taxation, as there is no Capital Gains Tax (CGT) and Inheritance Tax (IHT) on transfers between husband and wife or between civil partners.

 

When splitting family assets and debts, you should disclose:

  • Full details of your financial circumstances, otherwise a financial settlement with your spouse or civil partner could be declared invalid.
  • Your personal plans, for example if you are intending to remarry or to live with a new partner.

Apart from that, negotiating an agreement with your husband or wife, you have to:

  • Assure a financially secure future for your children. There is a general rule stating that an absent parent ought to pay no more than 30 p. c. of his or her net income in child maintenance. Child support (child maintenance) is usually paid for children until they reach the age of 17 or finish full-time education. Each partner has the right to demand child maintenance from the other by voluntary agreement, through the court or through the Child Support Agency. The latter is a governmental body to make sure that parents who live apart from their children contribute to their upkeep by paying child support. Maintenance payments are not subject to Income Tax. The Child Tax Credit is available only to a single parent if he or she lives together with one or more children.
  • Allow for cash payments of lump sums (bridge money) to a financially weaker partner as for example to an unemployed wife.

If you can communicate with your partner amicably, you will probably be able to arrange – with or without the involvement of your solicitors – a division of the following most conventional family assets and liabilities:

  1. Money on current and savings accounts, financial investments, personal belongings of value on the one side and personal debts, bank and private loans, credit card balances, unpaid taxes on the other side are easy to assess and to split up between divorcing spouses or civil partners. It is advisable to consult all these matters with your bank and financial consultant.
  2. Family home is usually the major asset a couple own. All family properties should be valued, allowing for mortgages and other liabilities. If only one spouse or civil partner is going to live in the family home, the other one should be adequately compensated with other assets.
  3. Mortgage credit matters should be settled in cooperation with your mortgage lender. If you are to become a sole owner of the family property, you might need a new loan against the equity in your home or a repayment holiday. If only your partner was the mortgage borrower, you may be entitled to a first time buyer mortgage, which gives you flexibility you need. These and other solutions should be discussed and worked out with your mortgage lender.
  4. Private pensions. As a general rule, each spouse or civil partner is entitled to a share of the other spouse’s or civil partner’s pension. In practice, however, this requirement is rather difficult to meet in a simple way, since each pension is inextricably linked to its future holder. To manage this problem you can use one of the following methods:
  • Offsetting – the cash value of the pension is regarded as a family asset and the other partner receives equivalent for that value.
  • Earmarking – the other partner will receive a percentage of the future pension. This is a risky solution though, because if the pension holder dies before reaching the pension age, his or her former spouse or civil partner will not receive his or her share of the pension.
  • Pension splitting – a court can be asked to order a pension provider to divide the existing pension fund between the divorcing spouses or civil partners so that each of them has his or her own separate pension fund.

When divorcing or separating, you should remember:

  • To change your nomination of who will receive the death-in-service benefits from your pension or life insurance;
  • To alter your will or to make a new one, because divorce proceedings do not legally invalidate your existing will. Your spouse remains your next of kin until the final decree of divorce is issued and she or he will automatically inherit all of your estate in case of your death.

You are always welcome to contact Capital Business Links Ltd with all financial and accounting problems linked to divorce or separation. Please, call us on telephone number 0208 567 99 44 or send us an e-mail to obtain more information about our services or to arrange an appointment with one of our advisers.