Divorce and separation of step-families | Bulley Davey

Mar 17, 2022

It’s just as important to get good financial advice as it is to get good legal advice at a time of divorce or separation. 

Families can be complex and IFAs might raise other areas to consider that a solicitor overlooks.

As part of the divorce settlement, your assets will be divided between the parties. 

We can help you with some of the knottier issues, which we will summarise briefly in this blog, as well as ensure your finances are set up appropriately for your new life ahead of you. 

What happens to your pension? 

Pensions can sometimes be your biggest asset, but they are not always thought of because they are out of sight. 

They are also entwined in complex rules such as the annual and lifetime allowance, so it’s important to seek professional advice on splitting them fairly and sensibly. 

With the benefit of professional advice you can ensure that you continue to build up a retirement pot for each party, and that it is invested appropriately. 

An adviser will also help you to avoid any unintended consequences, such as a tax penalty.

Splitting property or shares tax-efficiently

One or both parties (individually or jointly) may own property or shares. When dividing these up, you could potentially save yourself significant sums in capital gains tax if you transfer assets within certain timeframes. 

Transfers between spouses are exempt from capital gains tax. But once you are divorced, a transfer of assets to or from your former partner does not benefit from this exemption. 

If you complete the transfer in the same year that you separate, however, then the transfer should be tax-free, so timing is important.

Remember that it’s not just property that is subject to potential capital gains tax, but transferring shares too. 

Tax is not the only factor to consider when you think about what happens to your investment portfolio. 

Are both partners happy with the level of risk/reward in the investments? Perhaps one partner previously made all the decisions about where to invest. 

Are both parties sufficiently in the know about how the money is invested, why, and what the implications are? 

If it is likely any investments will be sold upon the divorce settlement, now is a good time to review your respective risk/reward profiles. 

What was right for your old situation as partners may not be best going forwards now you are apart.

If you get a lump sum as part of the divorce settlement and are not sure what to do with it, a good IFA can guide you. 

Don’t forget your life insurance policy

Another thing that may get overlooked is the life insurance arrangements. Normally the beneficiary of your policy is your spouse and/or children. After a divorce, you may want to rethink these arrangements, particularly if you have a new partner, or you now have step-children.

Savvy investments for your children and step-children 

You may choose to use part of your lump sum to invest in the financial future of your children or step-children. 

One of the most tax-efficient ways to save for a child’s future is by using an ISA. You can invest up to £4,128 per year in a Junior ISA. 

Or, investing in a Lifetime ISA can help your child buy their first home. They can save up to £4,000 a year this way, but the added benefit is that the government contributes 25% per year on the sum in the pot.  

Double-checking inheritance arrangements

Intestacy laws can create unintended consequences if you either don’t have a will, or your will isn’t sufficiently clear. 

Don’t take for granted that your assets will simply pass to your children, or your new partner after a divorce. Especially if you have step-children, be aware that they have no right to inheritance unless it’s written into a will. It’s a good idea to draft fresh wills after a divorce. 

Any major change of circumstance like divorce or a future remarriage should be a trigger for financial advice. 

If you’d like to discuss your financial position in light of a relationship change, get in touch.

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