Cost of Living Crisis – Will it Affect My Divorce Settlement?

In this blog, FLiP Director David Allison provides his thoughts on the current cost of living crisis and any impact it may have on divorce settlements. 

It is impossible to escape the constant news feed about the cost-of-living crisis and the seemingly dire economic forecast for the UK.  Little wonder that many people are feeling gloomy and considering life changes including for some, separation and divorce.  The question then may be whether now is the right time, when money is tighter than it was and if so, what will be the impacts on the family finances.

Of course, the decision to separate and divorce is a deeply personal one that people arrive at usually after many months and sometimes years of thought.  Inevitably, at least for most, the financial consequences of that decision are part of that long road to arriving at the decision to divorce.

So, is it better or worse to separate/divorce during a cost-of-living crisis?

The cost of borrowing may be a significant factor. With interest rates considerably higher than they have been for many years, taking a mortgage now will mean higher repayments – at least for the near future.  This may impact on the sort of property that it is possible to acquire post-divorce. Even if a family is mortgage free, it may be necessary, post-divorce to supplement capital for housing with a mortgage to provide for two homes. If there is already a mortgage, hopefully this is a fixed rate protecting against the worst of the current high rates.  If it is necessary to break that fixed term and replace it with two mortgage at higher rates, the impact on the family finances can be significant.

Many couples may consider delaying a sale of the family home to avoid penalties and to wait until rates are more manageable.  This is likely to mean that one person has to rent.  This was (and is until 6 April 2023) problematic in terms of capital gains tax and the Principal Private Residence (PPR) exemption, as a departed spouse could only claim PPR relief for 9 months following separation. Under draft legislation due to be implemented at the start of the new tax year, that period is extended indefinitely, provided that the sale of the home is by agreement or order on divorce. This is not automatic however and the departed spouse must make a PPR election.

The new legislation will also extend the CGT exemption on transfers between spouses that take place within 3 years of separation as opposed to only in the tax year of separation as currently.

Other than borrowing costs, we are facing increasing costs for day to day living expenses, particularly food and energy.  This will impact on budgets and potentially, levels of maintenance post-divorce at a time when income may not be rising to keep up.  This may all exacerbate the financial strain on families post-divorce.

However, it is never a “good” time to divorce and arguably it is better to set budgets when basic living costs are high and hopefully will fall.  Perhaps this will also encourage couples to take a more constructive and less costly approach to resolving the issues they face on divorce.  This can only be a good thing.

As I have said, the financial consequences are only one factor in the decision to divorce.  It will be important for anyone contemplating divorce to think through all of the consequences before pushing the button.  It may help to talk it through with someone who understands the issues and can help an individual to make what is invariably a difficult decision.  At FLiP our counsellors can provide that space and expert support so that, whenever the decision is made, it is more likely to be the right one. If you would like to get in touch with one of in-house therapists, contact Wendy Hoare, details of whom can be found below.