Counting the cost of staying together

Spouses may be staying together longer, but not for the right reasons. And, warns Chiara Cavaglieri, it could cost them

Growing numbers of separating couples are becoming trapped in their homes and lives as the jobs and property markets continue to plummet. Financial difficulties, amplified by the recession, can place a strain on any marriage but the cost of divorce or separation can spiral out of control. In fact, it takes five years to recover financially from a divorce, according to market research agency BDRC.

Divorce settlements involve dividing assets as equally as possible but this is rarely a simple process so it is important to understand the legal implications of any proceedings and seek independent financial advice. Keeping the settlement as amicable as possible is the easiest way to cut down costs and there are even cheap and speedy do-it-yourself divorces which can be bought online from sites such as www.managed-divorce.co.uk and www.quickie-divorce.com.

For most couples, the martial home is the most significant part of negotiations. With the property market in disarray divorcees may have to wait until prices have picked up to sell their homes but delaying can bring its own complications, particularly if one partner is reluctant to sell. "Neither side can force the sale of a property if owned in joint tenancy, however, in reality one needs to buy the other out," says Danny Cox, of independent financial adviser Hargreaves Lansdown. "It's rare that people are able to afford this so the property is sold and the proceeds divided."

But waiting for a stronger housing market and a better price may also have tax implications as HM Revenue & Customs could deem the transfer of assets as liable for capital gains tax if they occur outside the tax year in which the couple separates. Additionally, a spouse that has not lived in the property for the three years prior to the divorce will be liable for capital gains tax.

Married couples will usually decide to own their marital home as joint tenants so that if one partner dies, the surviving partner automatically owns the house, regardless of whether a will has been drawn up. Yet with divorce thrown into the mix, this can become a more complicated decision. "A lot of people get naturally sucked into the joint tenancy path but it is worth considering setting up ownership of the home on a 'tenants in common' basis," says Kim Barrett from advisers KS Barrett & Associates.

Under this arrangement, each owns a distinct share of the property which is left to whomever they choose in their will. The division can be varied to reflect a greater financial contribution if necessary. However, in the eyes of the court, legal ownership of the property is not the deciding factor when dividing assets, particularly when children are involved. "If you are married, all assets are known as the marital assets and are divisible equally between the couple, regardless of how they are owned," says Mr Cox.

Pensions are another vital part of a divorce settlement and there are three options open to a divorcing couple. Pension offsetting is the most common option and involves the pension being balanced against all other assets, usually the marital home. For example, if one spouse has a pension fund worth £100,000 and jointly owns property worth £100,000, the pair can agree that one keeps the property and the other keeps the pension.

With pension earmarking, a proportion of one spouse's pension is allocated to the other, but it is a less popular option because the payment is only made when the holder retires. It leaves one spouse with no retirement income until that time.

Couples can also split the pension into two new funds. The rules for this were primarily introduced to make pensions fairer for divorced women who did not contribute to a fund after giving up work to look after children. The split is declared as a percentage of the value of the pot once the Decree Absolute comes through.

Providers can calculate the worth of each pension pot but it is important to remember that investments can be valued in a number of different ways. "When splitting a pension on a final salary arrangement you take the transfer value but that won't recognise the true worth of the scheme," says Mr Barrett. Similarly, with a money purchase scheme, a valuation may not take into account early retirement penalties.

Debts as well as assets will need to be divided. Many couples have their partner as an additional signatory or cardholder which means that both parties are considered by the lender to be jointly liable for any debts. Credit cards can be transferred into single names but joint bank accounts should be closed as soon as possible although it is advisable to set up separate accounts before letting the bank know as it may automatically freeze the joint accounts of couples who are planning to divorce.

Once arrangements have been made a final consent order should be obtained which prevents any further claims and new wills should also be made to accommodate the changed circumstances.

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