Divorce is a process that costs time and money. For the overwhelming majority of people going through divorce, the impact on their financial situation is not only immediate and significant but also long-term. A divorce has the potential to undo the fiscal and economic status quo of one or both parties for years and decades after the court signs the final order. Divorce is rarely “fair” when it comes to money, even if people believe it is on an emotional level.
But how much a divorce should cost is a highly personal matter and entirely circumstantial, depending on a wide array of assets, liabilities, legal factors, and details specific to a relationship and its termination. The hidden costs of divorce in the UK are not at all uniform and can almost double or triple an initial budget in ways that the involved parties and their lawyers do not foresee and prepare for.
From pension valuations worth thousands of pounds each to estate agent fees on a forced property sale or from tax complications that no one thought of to maintenance payments stretching a decade or more, hidden costs are as various as they are unpredictable. The financial implications of a divorce usually start later than one would think and only grow after the proceedings have ostensibly been concluded.
A good understanding of these hidden costs of divorce in the UK and a way to avoid them is an invaluable asset for any person going through a divorce or on the brink of one.
The Divorce Iceberg: The Tip and the Hidden Bottom
The out-of-pocket expenses of divorce that most couples immediately see and prepare for upon separation are the visible tip of an iceberg of far more costly components of the process that only appear later. Legal fees and the costs associated with finalizing the proceedings are usually the only part of the financial implications of a divorce that are on people’s minds at the start.
Sarah, 34, lives in Manchester. When she separated from her husband four years ago, she set a budget of £15,000 for all legal and ancillary costs in her divorce proceedings. When the final order was signed two years later, she had spent over £45,000 when factoring in pension valuations, four property valuations, tax advice, financial planning consultations, temporary accommodation, and agent fees from the sale of two properties. Her story is not uncommon.
The number of “hidden costs” and their expenses can be substantial as there are far more variables in most divorce cases than the most thorough family lawyers and the prepared parents would care to think of at the start. Divorce is no longer about splitting bank accounts, paying solicitors and going your separate ways. Couples today are likely to have a complex set of financial arrangements from multiple pensions, to shareholdings in family businesses and investments, diverse life insurance policies, and even future earning potential and bonuses to work through.
Each of these assets or potential assets might trigger professional fees and financial transactions that are hard to quantify or that often arise only in later stages of the process.
Hidden Fees: The Professionals That Divorce Solicitors Don’t Provide
Lawyers deal with legal questions but only provide some of the professional services that a divorce is likely to require. The process is likely to engage a small army of outside professionals, and divorce solicitors and barristers are often the ones who call these people in and pay their fees. A full list is as follows.
Financial Advisers. Financial advisers are likely to be involved if the financial situation is complicated and one of the spouses does not have the financial literacy or experience to understand the ins and outs of the process. Fees for financial advice can be £150 to £500 per hour and total fees for financial planning for divorce can range from £3,000 to £8,000 or more. Detailed pension planning, complex inheritance tax planning and reorganising investment portfolios are all likely to require professional input.
Accountants. Accountants might be required if there is a business element to the process, complex tax issues, or foreign income and assets. Simple advice can cost the same as financial advice and more complex work with business assets, stock valuations, international tax arrangements and forensic accounting can run to £200 to £600 per hour and fees of tens of thousands of pounds.
Forensic accountants are specialists within accounting, often used when there are concerns about hidden assets, complex business valuations, overseas income or business affairs, and possible non-disclosure or concealment of funds. Hiring an investigator of this sort can be very expensive, with fees of £200 to £600 per hour and complex cases running to tens of thousands of pounds.
Pension specialists. Divorce solicitors in Barking, Bristol, or Banbury will usually deal with dividing up pension wealth by a pension sharing order, but to get to that point a comprehensive valuation of the pensions in question is required. Pension valuations usually cost £1,500 to £4,000 each and most people have more than one pension, either through former or current employers. Pension assets are usually the second biggest source of wealth (after the matrimonial home) and their valuation is unavoidable.
Property Valuations. Property valuations start from around £400 to £800 for a basic RICS valuation by a chartered surveyor, but they are often disputed by one party or another. In these cases multiple valuations have to be commissioned which doubles the costs at the least. Specialist valuations, where family homes have unusual features, development or planning value, and commercial properties, usually cost in excess of £2,000 each.
Divorce and the Property Conundrum
The property conundrum is one of the reasons for the enormous costs that a divorce often entails. The family home often needs to be sold as a condition of a clean break and a clean break as an outcome is what most divorcing couples aim for. Estate agent fees and legal costs on the sale of the matrimonial home will add a further 1% to 3% of the value in fees (plus VAT) to the list of hidden divorce costs.
Divorce Solicitor fees for the property sale will add another £1,000 to £2,000 to the bill, with Energy Performance Certificates, searches, and surveys being more costs in the hundreds of pounds. If the house needs any work to make it sellable, the costs can rise steeply.
In cases where one spouse wants to keep the matrimonial home and the other needs to be bought out of their share of the equity in cash, the process usually requires the remaining spouse to remortgage the property to pay the departing spouse. This involves mortgage arrangement fees, valuation fees, broker fees and possibly an increase in interest rates and is often unavoidable.
The costs associated with the family home are just the start. Most couples own more than one property, whether other residential homes or buy-to-let investments, and these properties and their associated costs usually multiply in proportion to the number of properties.
Tax bills can be in the tens of thousands of pounds for investment properties if the couple wishes to sell as part of the divorce deal. This is because the disposal of buy-to-let property often crystallises substantial capital gains tax liabilities, where it is not possible to use capital losses or the annual capital gains tax exemption of £6,000 against the gain.
Tax costs and the rules around capital gains tax disposal at divorce are among the most under-appreciated of all the hidden costs of divorce in the UK.
Divorce and Pensions: The Hidden Complexities
Pensions are usually the single most complex element of most divorces, yet they are often given little thought at the start of proceedings. Even couples with no pension wealth other than basic National Insurance contributions will likely have multiple pension arrangements that are not immediately obvious or understood.
The Pension Advisory Service reports that over 40% of divorces involve pension assets. This is despite the reality that there are more defined contribution pensions than ever before as the rise of auto-enrolment has seen most employees put into workplace pensions for the first time. The same rules apply to workplace pensions set up by employers and pension scheme trustees for this purpose as apply to any other type of pension.
The fact that these pensions are often employer sponsored often means that individuals do not fully appreciate the pension rights they have accrued until the point they retire or they divorce and the issue is examined in detail. Pensions can be divided between former spouses in what is known as a pension sharing order and often have to be divided in this way due to the complex nature of the assets themselves.
But to get to the point where a pension sharing order is fair and equitable, the actuarial value of each scheme has to be established. This invariably requires a specialist actuarial report for each pension scheme valued, at a cost of £1,500 to £4,000 per report. Most people with careers have at least two and often many more pension arrangements.
The most onerous of these to value is defined benefit pensions. Calculating a fair and equitable pension sharing order for defined benefit schemes is a complex and time-consuming process. The actuarial valuations of defined benefit pensions also cost more due to their complexity, with fees often in excess of £3,000 per report.
Special rules apply to public sector pensions and local government pensions including teachers’ pensions, NHS pensions, police and fire service pensions, and military pensions. All of these often require a specialist adviser as each pension has its own rules, and their own preferred methods of calculation.
The implementation of these orders also involves significant cost. The parties will usually have to pay the pension provider for the costs of implementing the order which is a further £300 to £1,500 per order made.
Many people also discover during divorce proceedings that their pension arrangements are far more complex than they had assumed. Contracted-out benefits, AVCs, and protected rights often have to be identified, valued, and considered in the divorce settlement in addition to the main scheme benefits.
The cost of unpicking these arrangements can be £10,000 or more in cases where there are two or more pensions and multiple benefits.
Tax implications of divorce are far more complex and far reaching than people often appreciate when they first separate. Capital gains tax is often the first tax issue that people become aware of during divorce when they must sell property or business assets, only to find that there is a tax bill even though they are selling to someone with whom they have had a close personal relationship.
Income tax is also a highly complex area when it comes to maintenance payments, and the rules are different now from in the past in ways that few people are aware of. There is a lot of misunderstanding on the subject, with some people believing that the tax rules on maintenance are going to change back to what they used to be.
The upshot is that maintenance is paid gross and not subject to tax, which is to say that the person receiving maintenance from a former spouse pays no tax on that income. The person paying maintenance will also not get tax relief on maintenance payments. This was not always the case but due to political inertia and lack of consultation, the rules around this have changed little in years and are here to stay.
The costs of getting professional advice on tax at divorce are far more than most people imagine, and these costs are often very high. It is not unusual for comprehensive tax advice to cost between £2,000 and £8,000 for a full report with recommendations that provide guidance on many aspects of the financial settlement.
Stamp duty land tax (SDLT) is also a tax implication that creates unexpected cost for most couples in a divorce. This is because the transfer of the matrimonial home, or indeed any property, between married couples is exempt from SDLT, but not when it is transferred as part of a divorce.
Timing of transfers is critical to ensure that SDLT exemption applies and if done wrong there can be a substantial stamp duty land tax bill for a couple divorcing. The costs of stamp duty on the sale of a property are 1% to 3% of the sale price, so for a £400,000 property the SDLT bill would be £4,000 to £12,000, plus VAT on the SDLT itself.
Children and Divorce: The Continuing Financial Costs
Divorce usually has much longer term financial costs and impacts when there are children involved. Child maintenance costs are often understood in principle as the Child Maintenance Service has clear rules and formulas that are used to arrive at a number. The reality is that this number is rarely an accurate reflection of the actual cost of the children or what is required to maintain a particular standard of living for them.
Especially if the children are used to a certain lifestyle and level of consumption before the divorce, the parents often end up paying far more in child maintenance and extra-curricular expenses than is strictly required by the Child Maintenance Service.
Private school fees, leisure activities, medical insurance and other aspects often need to be separately negotiated and agreed, but many people find these can cost over £1,000 per child per month.
Childcare costs increase by a factor of several times with divorce. Where one parent usually provided childcare while the other worked full time, divorce usually requires paid childcare arrangements to be made for at least part of the working week. Childcare costs can also be substantial, and the requirement to pay for childcare you would otherwise do for free adds up quickly.
Divorce usually also means that the remaining parent has to buy larger accommodation to take the children for contact visits, and many divorced parents end up paying over the odds for housing as a result.
Business Assets: Hidden Costs and Valuation Complexities
Divorce becomes much more complex when either of the parties own business assets or business interests that need to be divided or compensated for. Business valuations usually cost in the region of £5,000 to £25,000, and it is common for several valuations to be necessary.
Valuations take time, which can impact a business if the owner or spouse/partner is tied up with other matters. Business valuations are especially contentious as they can often produce wildly different results, depending on how they are carried out and the methodology used.
Divorce and international elements, such as foreign property and overseas pensions, create numerous hidden costs and other challenges. Foreign property and overseas property valuations are always more expensive and difficult than domestic valuations.
The more foreign elements are involved, the more the divorce costs tend to increase. There is no way to speed up this process and costs inevitably rise. Currency hedging is often a key consideration if substantial foreign assets are involved as exchange rate fluctuations can have a material impact on the value of the settlement.
Divorce is always likely to have interim costs and implications. It is unusual for couples to be able to carry on as before until all the details are finalised and a settlement has been agreed. If the couple wishes to sell the matrimonial home or other assets and split the proceeds, it is common for them to need separate accommodation in the interim.
This can double or triple the costs of housing for a period that can be between six and 24 months in the case of protracted divorces. Solicitor costs also increase when applications for interim orders are needed, correspondence and negotiations take place and all the other aspects of the case need management between separation and settlement.
