The Impact of the Budget on Divorcing Couples?

Friday 21 March 2014

How do the 2014 Budget changes effect divorcing couples?

Firstly, couples who are divorcing or separating with a jointly owned home will need to pay attention to the 2014 budget changes in respect of Capital Gains Tax (CGT). The change in the rules will have an impact on the spouse who moves out of the family home, buying and occupying another property as their main residence.

The private residence exemption is the rule whereby no CGT is payable on the sale of a dwelling house that has been an individual’s sole or main residence for their period of ownership. Married couples are permitted to have one tax-free main residence between them and are therefore exempt from CGT on the sale of the family home.

However, in cases where one spouse has left the former matrimonial home and now owns and occupies another property as their main residence, the exemption used to continue to apply for three years for them in respect of the first property. However, as a result of the budget changes (with effect from 6th April 2014) the three year exemption has been reduced to just a year and a half. It will therefore be in the interests of the party who has left the family home for it to be sold or transferred within a year and a half of them leaving so that they do not need to make financial provision for a CGT liability.

The budget changes are also set to bring about major reforms to the area of pensions.

One key change is that people will be able to draw down all of their pension pot in cash when they retire without having to obtain an annuity to provide an annual income, subject to them paying tax at their marginal rate. The impact of this change on divorcing couples remains to be seen but we believe these changes could be significant.

Currently a Pension Sharing Order sees the couples’ pension benefits being divided between them at the time of the divorce. The benefit of the pension fund is then transferred to the recipient spouse who can usually choose to either transfer their share into a new fund or remain in the current scheme. With the change announced in the budget it is questionable whether Pension Sharing Orders will be used as frequently in cases involving divorcing couples aged 55 and over. Instead of opting for a Pension Sharing Order the recipient spouse could in theory instead accept a lump sum, or a cascading series of lump sums, that could be drawn down whenever needed from the larger pension fund over a period of time and paid to the other spouse to compensate them for the difference in pension values. This will clearly be an area where specialist legal and financial advice will be needed.

Another potential change is in respect of offset calculations whereby one party commonly retains more of the capital e.g. savings and investments in return for the other retaining their higher valued pension intact. Usually offsetting is not done on a pound-for-pound basis to take account of the fact that pensions have historically not been easy to access and because of the inability to draw down the whole fund. With that change now on the horizon, the extent (if any) of that discount is now much more open to debate, particularly with couples who are over 55 and in money purchase pensions.