How will getting divorced affect my finances?

I remarried 18 months ago after several years as a widower. I now realise that my second wife and I are not compatible, so I’m wondering how a divorce would affect my finances. I am retired and we live in my former marital home. My wife is 10 years younger than me and has a 14-year-old son, who spends most of his time with us.

Anita Shepherd, a family law partner based in the Manchester office of Fletcher Day, says relationship breakdown is never easy, but it is no doubt more sensitive given that you are experiencing this event later in life, having endured the loss of your first wife.

First, I would suggest you carefully explore whether there is any possibility of saving the marriage and, if there is, that you and your wife seek relationship counselling.

If you are certain your marriage is at an end, I would strongly recommend family mediation as a first port of call. This involves the appointment of a neutral and impartial third party who will attempt to help you and your wife reach agreement over every aspect of your divorce. You will not be permitted to issue court proceedings in relation to your finances unless you have tried or been exempted from mediation. 

I will presume you have not entered into a prenuptial or postnuptial agreement which seeks to protect your pre-acquired assets such as your property in the event of a divorce, but if you have done so you should seek professional advice on the validity of the agreement. 

The length of your marriage is relevant to the distribution of assets. Medium to long-term marriages attract the sharing principle where assets are generally split equally between the two parties. With short marriages, the court can depart from the sharing principle and look at what each party brought into the marriage. Eighteen months may well be considered a short marriage, although the court can add on premarital cohabitation.

Assuming that you didn’t live with your wife before marriage, this should put you in a good position in terms of preserving your premarital home and your pre-acquired pension. However, other factors will also be considered. The disparity in your ages will also be a relevant factor, as will both parties’ ability to work or become self-sufficient.

There is a possibility that you may be liable to maintain your stepson if you have treated him as a child of the marriage and financially supported him. The court would also consider your wife’s income needs.

Regardless of what the court decides, your wife and her son will be entitled to remain in the house if she registers a Matrimonial Homes Rights Notice at the Land Registry, giving her rights of occupation pending the resolution of your divorce and finances. 

Will tax shake-up affect our family investment company?

We set up a family investment company (FIC) as a tax-efficient way to protect our assets and help pass them on to our children. Will the chancellor’s plan to raise corporation tax affect our tax liability, and if so, does an FIC still make sense?

Mike Hodges, partner and head of the private wealth team at Saffery Champness, says the chancellor announced an increase to the rate of corporation tax from 19 per cent to 25 per cent in his Budget in early March. 

However, this change is not scheduled to take effect until April 1 2023, so there is time to plan for the impact. Companies with profits of less than £50,000 will not be affected by this change, but this exemption will not apply to the vast majority of family investment companies (FICs) which will face this higher corporation tax rate.

The immediate answer to your question is that in all likelihood your FIC will still make sense. Nevertheless, it is still a good idea to make use of the two-year window to review the position of your FIC and take appropriate action before the increase takes effect. For example, it may be appropriate to review the FIC’s investment strategy.

There are two obvious areas to consider. First, dividends received by a company are not generally subject to corporation tax and, as things stand, this will continue beyond April 1 2023. This compares with the top income tax rate of 38.1 per cent for an individual receiving dividend income and makes the holding of dividend-paying equity investments by your FIC potentially very attractive. As long as this fits with your investment objectives and risk profile, it may be worth exploring further.

Other investments it might be worth considering further are those that produce longer term capital growth so that in the short term the FIC has no profits subject to the new higher tax rate.

However, a word of warning here. Following the April 2023 changes, the rate of corporation tax a company pays on its capital gains at 25 per cent will actually be higher than the personal capital gains tax rate, which is 20 per cent for all assets other than residential property. This could change if the recently discussed closer alignment of CGT and income tax rates is introduced.

This contrasts with the rate difference between corporation tax and the higher rates of income tax. Even with the forthcoming corporation tax increase, this will still be as much as 20 per cent, with an individual paying income tax at the additional rate of 45 per cent paying at nearly double the increased corporation tax rate.

Of course, this change affects only one aspect of the tax treatment of your FIC and, as I say, on its own shouldn’t be enough to blow your plans off course. You mention protecting your family assets and using the FIC to help pass these to your children, and these longer-term benefits very much still apply.

With longer-term planning strategies such as FICs, it is inevitable that there will be a need to keep them under review to ensure they still deliver the benefits originally intended.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

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