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Recession, new CGT tax relief to impact divorce rates in unexpected ways says research

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A cost-of-living crisis, paired with an economic recession and late-paying clients could be the perfect storm to put enough strain on a freelancer’s marriage to break it up. However, various studies have suggested divorce rates may actually decline during a period of recession. 

MoneyTransfers.com, for example, examined divorce rates in the UK and US from 2005 to 2011 and found that the percentage of couples getting a divorce (per 1,000 people) actually dropped slightly during the most recent major recession of 2007-2008. 

In the UK, it fell from 2.3% in 2007 to 2% in 2009; and in the US, it fell from 3.6% to 3.5% between 2007 and 2009.

Why would divorce rates fall during a recession? 

According to the MoneyTransfers report, a few possible reasons could contribute to couples holding off a divorce, even if their relationship has been on the edge for some time.

  • The loss of a job or fall in home value may make the expense of a divorce a bigger factor;
  • Additional costs following a divorce including housing, legal fees, childcare and reduced economies of scale may even make it impossible;
  • Even if families’ jobs and homes are not under threat, changes in the job and housing markets may shift their decision-making

Hard economic times, however, may draw couples closer together and spur them to work through their conflicts. The little things do not seem to matter and when they know the rest of the country is struggling financially, too, they are not alone.

Jonathan Merry, CEO of MoneyTransfers.com, reflected on the findings, “Getting divorced is never easy, and nearly always comes with complexities and choices to make. In that sense, it’s not surprising that some of those who can – which is certainly not all couples – may defer the decision to get a divorce until there is less instability and uncertainty in wider society. 

Some will feel like they need to wait until they can actually afford a divorce, or will do this unknowingly once the recession has ended, when they can better imagine their prospects on the other side. 

Jonathan Merry, CEO of MoneyTransfers.com

“When it comes to a potential recession this year – which more and more analysts are discussing as a possibility – it will be interesting to see if there is a similar effect. Countries are being battered by a cost of living crisis, with energy prices particularly painful, and average house prices having soared to record highs. Rental prices are also spiking. However, job markets remain tight, and in fact there are a record number of vacancies available in the UK. So it’s worth noting there are a mix of complex factors at play.”  

Does the recession effect last on a marriage? 

However, MoneyTransfers.com also found that divorce rates increased in the aftermath of the financial crisis – rising to 2.1% and 3.6% in the UK and US, respectively, in 2010, and then stayed steady.

And a wider look at divorce rates between 1994 and 2014 shows the rise is actually out of the norm, since the figures had been trending downwards already when the recession hit. 

Does the end of a recession mean more divorces?

The UK economy moved out of a recession in the last quarter of 2009; and 2010, as shown above, saw more divorces. 

report from the Office for National Statistics (ONS) at the time pointed out that between 2003 and 2009 there was a general downward trend in the number of divorces, but in 2010 they rose by 4.9%.

The ONS said at the time: “One theory suggests recession could contribute to a rise in partnership break-ups because of increased financial strain.”

“Recent trends could be consistent with the theory that recession is associated with an increased risk of divorce, but with a delayed impact.”

Tax relief for divorcing couples, as tax rules change

  • Capital Gains Tax rules for divorcing couples are set to change on 6 April 2023.
  • Right now, if a couple transfers assets between them any time after the tax year in which they separated, there may be tax to pay.
  • The new rules will give couples three years tax free – and unlimited time when a transfer is part of a formal divorce agreement.
  • The rules around property are also changing.

The government has published a policy paper outlining its proposals: Capital Gains Tax: separation and divorce)

“When you’re going through a divorce, there’s already enough stress and pressure to be getting on with,” said Sarah Coles, senior personal finance analyst, Hargreaves Lansdown.

Couples don’t need the added trauma of being on the clock to split their finances before the end of the tax year. This welcome change will be a huge relief to anyone going through a more complex split – or a poorly timed one – giving them more time to come to an agreement.

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown

According to Coles, as it stands at the time of writing, any transfer of assets between the couple in the same tax year as the separation is considered to be a transfer between spouses – so it doesn’t trigger Capital Gains Tax.

However, if you cross tax years while you’re still sorting out the details, any transfer could potentially be subject to the tax. For anyone who splits late in the tax year, or takes a while to come to an agreement, this can be horribly expensive, Coles warned.

“From next April, the rules will change, so couples have three years from the split to share assets without triggering a tax bill, and an unlimited time if those assets are part of a formal divorce agreement,” said Coles.

She continued, “They will also introduce rules for someone who moved out of the family home but kept a share in it. When it’s sold they will be given the option to claim Private Residence Relief. Those who have transferred their interest in the property to their ex, will be able to apply the same tax treatment to the sale proceeds as applied when they transferred it.”

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