How to approach financial planning for divorce

Divorce is a difficult and emotional experience, and it’s often accompanied by a great deal of uncertainty. Not only do couples need to untangle their shared lives but they also have to navigate complex financial issues such as asset division and tax on asset sales.

In this scenario, financial planning can help to provide clarity. With a plan in place, you’ll be better equipped to make rational financial decisions, and this will help to steady the ship, creating a path to financial security.

Understanding your finances

When financial planning for a divorce, it’s a good idea to start by conducting a comprehensive financial inventory detailing your assets, liabilities, income, and expenses, along with those of your partner.

Having all your financial information in one place will give you a clearer sense of your financial outlook and lay the groundwork for informed decision-making. It will also help in identifying potential financial vulnerabilities.

When noting down your assets, don’t forget to include pension accounts. These can be one of the largest assets a couple has.

It’s also important to consider business assets. Even if you’ve never been involved with your partner’s business, you may be entitled to a share of the company upon divorce.

When conducting a financial inventory, it can be worth speaking to a financial adviser, especially if you own complex assets such as businesses or private assets. An adviser will be able to help you create a balance sheet of joint and individual assets with up-to-date valuations.

Navigating asset division

Once you have detailed all your assets, you can start to think about how you may split them. When financial planning for divorce, couples often split the value of their assets 50-50. But this doesn’t necessarily mean that the assets will be split down the middle. Often, this is not convenient, or efficient from a taxation perspective.

Again, a financial adviser can add value here. An adviser will be able to explore creative asset division solutions, such as co-ownership or phased buyouts, in order to minimise asset sales and maximise financial security for both parties. An adviser will also be able to help you understand the trade-offs of different asset divisions, advise what assets would be most favourable to retain after the divorce, and model potential settlement scenarios and their long-term financial implications.

It’s worth noting that there is a distinction between matrimonial assets and non-matrimonial assets. The former are those that you and/or your spouse acquired during your marriage. They could include the family home, pensions, investments, savings, antiques, and art (they could also include any property acquired before the marriage if this was purchased for use as the family home). Meanwhile, the latter are those that existed before the marriage. These assets could include inheritances, shares in family businesses, or property bought as a single person. Matrimonial assets will need to be divided whereas non-matrimonial assets are not normally subject to division unless one spouse is in a position of real need.

In terms of pensions, there are three main ways that pensions are dealt with upon divorce. These are pension sharing, where you split one or more pensions. Pension offsetting, where pension rights are balanced against other assets, and lastly pension attachment, where part or all of the benefits from a pension go to the ex-spouse when the pension pays out. The way you deal with your pensions could have a long-lasting impact on your financial security, so it’s important to take the time to understand your options and seek advice from an expert.

Preparing for tax

When dividing assets, it’s crucial to think about tax. Capital Gains Tax (CGT), in particular, needs to be considered. CGT can arise on the sale or disposal of an asset if it is sold at a higher price than the original cost. For high earners, the CGT rate is 28% on residential property (no CGT is payable when you sell your main home) and 20% on other chargeable assets. If you are married, you can transfer assets to your partner without any CGT until you separate. However, after that, you can only transfer assets free of CGT for a limited time.

It’s worth pointing out that ISAs can be complex from a tax perspective. ISAs can only be held in one person’s name, so if you are dividing them on divorce, they will lose their tax benefits.

Given these tax issues, divorcing couples should think carefully about the split of their assets and seek advice from experts to minimise the tax cost of their separation.

Protecting assets

When it comes to protecting your assets, the best strategy is to be prepared.

In the event of a divorce, family members often have concerns about what will happen to money that has been gifted from one generation to the next. This is where loans can come in. Monetary gifts from family members usually have little protection when couples divorce. However, it’s a different story for money that has been provided as a loan. Typically, the loan will need to be repaid, preventing the capital from going to an estranged spouse.

Trusts can also be an effective way of protecting family wealth. These can be used to ensure that money goes to the intended beneficiaries. Trusts can be complex, however, so it’s important to consult an expert when setting them up.

Restructuring budgets and managing cash flow

When people get divorced, they often wonder if they’ll have enough money in the future. This is understandable, as one’s income and expenses can change significantly after a separation.

One area of financial planning that can be useful here is cash flow modelling. This can help determine how long your money will last and show you what your life could look like financially in the future. It can be quite valuable in the lead up to a divorce settlement as it can help you make sense of different scenarios and develop realistic budgets for the future.

Cash flow modelling can also be useful for spousal maintenance and/or child maintenance payments. If you and your ex-partner have children, you’ll both be expected to continue paying towards their costs after your divorce. One parent may have to pay the other, however.

How Bowmore can help with financial planning for divorce

Untangling finances during a divorce is challenging and decisions made at the time can have significant and long-lasting consequences. It’s therefore a good idea to speak to an expert when planning financially for divorce. An expert will be able to help you navigate the financial complexities associated with divorce, make well informed decisions, and emerge with your long-term security intact.

At Bowmore, we have a lot of experience in this area of financial planning. We understand the challenges that you are going through, and we can help you tackle them, whether they are related to cash flow and budgeting, asset division, retirement planning, or tax.

If you’re looking for information on financial planning post-divorce, take a look at our other blog: A guide to financial planning after divorce.

Want to find out more about how to make the most of the money you have, and how to enhance your financial security? Get in touch with us today.


PHONE 01275 462 469

  • Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority
  • Bowmore Financial Planning Ltd is not regulated to provide tax advice
  • The Financial Conduct Authority does not regulate cash flow Planning.

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