How to keep divorce costs down and split assets fairly

Roughly a third of marriages in the UK over the past half century have ended in divorce. The proportion of divorces in the under 45 age group has been trending down over the past three decades, but more and more people have been separating in later life. The financial implications of divorce can be huge but, with careful management, both parties can save a significant amount of money. 

When you get divorced the courts can order a transfer of wealth between separating parties. It is generally accepted that all assets accrued during the marriage should be split 50:50, unless there is a reason not to, such as a specific financial need. If one person had a large amount of money coming into the marriage, it can be argued that externally sourced pre-marriage money should be ringfenced. 

Courts look at a number of factors when assessing what a fair split of assets is and what maintenance allowance should be payable going forward, if appropriate. These factors include standard of living, length of the marriage, individual earning capacities and available resources. And the court isn’t interested in blame: for example, adultery is not a reason to penalise in a financial settlement. It might, however, consider conduct in extreme cases where it has had an impact on the victim, for example domestic abuse or the squandering of money.

“Dividing assets is more of an art than a science,” says Julian Hawkhead, senior partner at Stowe Family Law. He adds that the court has a significant amount of discretion which leaves capacity to try to come up with fairer outcomes rather than a one-size-fits-many approach. But this means that there can be uncertainty over the outcome. A good outcome may be “where both parties are equally unsatisfied”, adds Hawkhead.    

The higher earner may also have to pay an ongoing allowance to the person who is less well off so that they can maintain the living standard they have become accustomed to. If young children are involved, provisions for them are dealt with separately via the child maintenance allowance. 

Keeping costs down

As well as paying the government £550 to apply for a divorce, you also incur legal and maybe tax or financial advice fees. Lawyers typically charge by the hour, so the quicker you can come to a financial agreement with your former partner, the cheaper the divorce is likely to be.

Be completely transparent when declaring what you have. If you try to hide assets this will prolong the process and rack up fees, and you may get found out which would not be viewed well by a judge. Also, if you are found to be hiding one asset, you will be suspected of hiding others and incur further costs trying to protest your innocence. 

Lawyers' fees can range from about £100 an hour in some parts of the UK to £1,000 an hour in the shiniest corners of Mayfair. But the cheapest lawyer may not get the best outcome, particularly if it is a contested split. So, for example, Stowe Family Law, a large firm with offices across the country, charges between £100 and over £400 per hour for its most expensive lawyers. Different lawyers often collaborate on cases, with junior lawyers handling some routine administrative parts to keep overall costs down. 

It takes about three months for a divorce settlement to be processed, but it is likely to take several months for the settlement to be agreed. For example, Hawkhead says that his firm often completes agreements in six to 12 months, with total fees coming to less than £10,000. 

If you can’t agree on a settlement and it goes to court, the costs could hit five-figure sums due to barristers' and other experts' fees.

Partners have to be separated for two years before they can get a 'no-fault' divorce. But this time requirement is set to be scrapped next spring, and speeding up the process and taking out some of the acrimony, where possible, may cut costs.  

Splitting assets

Your main assets are likely to be the family home and your pensions. Pensions in particular need attention, as the current value may be different to the transfer value. If transfer bonuses or exit charges apply, make sure what is transferred is fair. 

Also ensure that all old pension pots are included in the initial asset valuation process. David Gibb, chartered financial planner at Quilter, says that when he separated from his wife, who worked in the NHS, she applied for a cash-equivalent transfer value for her pension which came out surprisingly low. It turned out that only details of her most recent 2015 scheme membership had been calculated, but the benefits she had accrued in her 1995 scheme had not. He might not have picked up on this if he didn't specialise in financial planning.  

A Quilter analysis of family law court data has found that only 14 per cent of divorce filings in 2018 contained some sort of pension settlement order. If you divorce later on in life, you have less time to build a retirement income if you didn't have a pension of your own, placing more importance on dividing this asset. If the wealthier spouse is likely to breach the pensions lifetime allowance it can be tax-efficient to split this asset.  

When pensions are split in divorce settlements, they are nearly always transferred into the name of the recipient – rather than them having a claim on the assets at the income phase, known as an attachment order. But unfunded defined-benefit pensions offer the holder's divorcing spouse membership of the scheme. If pension assets are transferred to you they stay withing a pension wrapper. The transferred assets don't count towards your annual allowance but do count towards your lifetime allowance.

When splitting assets consider the tax implications of accessing them, says Julia Rosenbloom, partner, private client tax services at Smith & Williamson. For example, if you have a house and family investment company worth the same amount, and you take one and your divorcing partner takes the other, it is unlikely to be fair because they are taxed differently when you try to access the money. 

Rosenbloom adds that capital gains tax is often where the biggest costs can be incurred. If you have separated but not divorced, transactions between you and your partner remain neutral for the current tax year. But after this they are treated as if there was a sale between the two parties. If you are set to incur a chunky capital gains tax bill, the further away from the end of the tax year you can get things sorted, the better.