Continuing economic uncertainty is having a significant impact on divorcing couples. Here, Philip Rutter explains what this means for financial settlements.
The last three years have seen the longest period of economic uncertainty in a generation. Those hoping for a period of post-Covid stability and perhaps economic growth, are likely to be bitterly disappointed. For those whose relationship has ended and are divorcing, the current economic turmoil will add further complications.
Valuation of assets
Volatility in the global markets is making the valuation of assets, whether property, investments, business interests or pensions challenging for the divorce lawyer. A valuation today might produce very different results from week to week, let alone month to month. Currency fluctuations, as shown by the rise of the US dollar, will pose challenges for international couples where assets are held in multiple jurisdictions.
Assets may need to be revalued at key milestones during a divorce and certainly before any agreement is finalised.
The valuation of a business is often a crunch point in divorce negotiations. It is not uncommon for one party to believe the business to be worth considerably more than it is. Those valuations will become more complex when facing tough economic trading conditions. Business owners will, understandably, argue that their business needs to hold on to cash in turbulent times to maintain its viability.
It is critical to have an independent valuation conducted by a forensic accountant to get a true and independent financial picture of the business and its assets, as well as a picture of its financial future to ensure a fair settlement and preservation of that business.
Housing and mortgages
House prices and mortgage lenders’ willingness to lend continue to shape the UK housing market. Lenders appear, at least for the time being, to be reluctant to lend as much as they were willing to against the value of a property. High interest rates mean people will be reluctant to take on the cost of a large mortgage, especially with the risk of a falling property market. The weakness of sterling has seen fresh interest from overseas investors looking to snap up prime property, particularly in central London, which may create a bubble for the most desirable homes.
Divorce agreements nearly always have to focus on the ability to provide a home for both parties, so if there is limited availability of suitable homes and funding difficulties, this will add further complications to negotiations.
Inflation and soaring energy prices would have been difficult to predict a year or so ago and continue to look unstable for some time to come. The need to prepare detailed budgets and forecasts of future income needs is essential when negotiating spousal and child maintenance awards. Maintenance awards are always capable of variation post-divorce if there is a change in circumstances, but the cost, stress and time it takes to review a maintenance order, means it is vital to get it right first time around.
Index-linked maintenance awards, once popular fell out of favour some time ago and courts stopped making such orders. They are now seeing renewed interest, but are vigorously opposed by the paying party, the central argument being that their income cannot be guaranteed to grow in line with inflation. A maintenance award that cannot be realistically funded will be the subject of a variation application within a short period of being made.
Pension pots and how they are shared form an important part of divorce settlement negotiations. The cash equivalent values are calculated on a given date. With significant changes in the stock market, their value pensions may well need to be revisited at key stages in negotiations. This is especially important where the parties are about to or have already retired and they do not have the luxury of time to ride out a volatile market.
It is essential that professional and expert advice is taken when negotiating divorce proceedings. Look to advisers that can bring the right team of accountants and experts together to build an accurate financial picture to support the financial disclosure process.
Uncertainty in the global economic landscape looks to be the only certainty for the foreseeable future. That means divorcing couples need to take the very best advice they can to reach a fair agreement.
Contact our Family Team
The Family and Divorce Team at Bishop & Sewell have a breadth of experience in dealing with divorce and separation, including all financial aspects.
The above is accurate as at 11 October 2022. The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.