Getting the numbers right

The reality is that in divorce cases, expert accountants are not popular with clients, lawyers or even the judge. The perception is one of unnecessary additional expense, potential delay and yet another witness that may have to be heard in an already stretched timetable. Ask an accountant what two plus two is and they'll answer: "What do you want it to be?". This anecdote sums up what many in the legal fraternity think of us.

However in an economy where going into business has been encouraged for many years, complex investment vehicles have never been more readily available. It is more likely than ever before that an accountant can help your client and the court implement a workable financial solution.

In most cases that we deal with we, are instructed as a single joint expert. For larger and complex cases, this may mean that 'shadow experts' are engaged by each party, but courts seem to like the single joint approach.We are usually not instructed unless parties are unable to reach agreement on the value of the matrimonial estate, or believe that they do not have all of the information required to enable an agreement to be reached.

Choosing the expert

When considering who to appoint, always consider their experience. Ask for references and follow them up; request examples of other cases worked on; can you work with the individual or are they remote and not user friendly; have they given evidence before; and, always obtain a fee estimate or range.

Terms of engagement

Make sure you obtain a letter of engagement or a client care letter setting out the work to be done, costs and delivery time. A properly trained and experienced expert will insist on both completing a conflict check before appointment and putting in place an engagement letter. If the person you are dealing with does not follow these basic steps, then reconsider the appointment.

 

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Top 5 ways to save your client time and money

• Engage an expert with the necessary expertise and do not shy from asking for and following up references.

• Agree a letter of engagement setting out the work to be done, fees and timing.

• Once you have the expert’s report make sure you understand it.

• For a single joint expert report, get help formulating queries that might be raised.

• Gather basic financial information to gain an understanding of the position and save time.

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Dealing with the report

Make sure you understand it and that it makes sense. If you are dealing with a single joint expert, ask another accountant to spend a couple of hours (it should not be an expensive exercise) reviewing the report and advise on what queries or issues might be raised. Too often the queries we receive have dealt more with nuances of wording, rather than the rationale for fundamental assumptions that impact upon quantum.

The expert will set out what information is required to complete the work, but you can both save time and gain a valuable insight into the financial circumstances of a matter, if you ask your client to provide basic financial information.

For valuation assignments, this should comprise a short written overview of the business, the latest set of full (not abbreviated) accounts with prior year or previous period comparatives, latest management accounts, any projections, budgets or strategic plan documents, details of any other share transactions that may have been implemented, and a copy of the articles or any relevant shareholder agreements. If the business owns land and buildings, it may be necessary to obtain
a valuation.

Asset tracing assignments are often talked about, but the reality is that they are expensive and have no guarantee of success. In these circumstances a party will engage their own expert and the mantra is always to follow the money; documentation is critical in this.

Any financial, credit card or other statements are relevant, together with details of finance arrangements, loans, pensions or savings. Travel itineraries can indicate the existence of overseas interests in a particular jurisdiction. However the amounts at issue need to be substantial to justify this approach.

Structuring the settlement

Despite the governments best efforts to convince us all otherwise, tax is very much taxing. And sadly divorce is no different. From the timing of separation
to the nature of the assets chosen to be split or sold, the impact of tax should not be forgotten.

Perhaps the most common misunderstanding with divorce and tax arises from its interaction with capital gains tax (CGT). The transfer of an asset between spouses or civil partners does not attract CGT. However where a couple separate during a tax year, the exemption only lasts to the end of that tax year.
So if a couple separate on 1 June 2015, the exemption will last until 5 April 2016. However what if the date of separation were 12 December, 26 January or even
5 April?

As most couples break up over time, agreeing the right date of separation can be critical in avoiding unnecessary CGT. A further frustrating issue is the market value rule for CGT, which forces that connected parties are deemed to have transferred an asset between themselves at market value, and continues to apply until the decree absolute. It follows that the issues created by the date of separation cannot easily be avoided.

Typically this creates the most surprise when dealing with the former matrimonial home, especially where a divorce drags on. While PPR relief (principal private residence relief) often comes to the rescue (where there is significant delay) a surprising and sometimes significant tax charge may arise.

One of the main pitfalls of arriving at a settlement figure are 'dry' tax charges. These arise where assets are 'gifted' between the parties outside of the tax year in which they separate. While reliefs are available (most notably PPR relief and business asset gift relief which can reduce any gain to nil, and entrepreneurs relief, which can limit the rate of tax to just 10 per cent) they are often not applicable.

Where they are not, the transfer of the asset between the two parties will often trigger a gain without the cash to pay the tax. For example, a couple own an investment property acquired for £100,000 that is now worth £250,000.

Where the joint ownership is transferred to one party, the transferor will incur a taxable gain of £75,000 i.e. half of the gain of £150,000. If we assume that this gain attracts CGT at 28 per cent and that no cash has changed hands, the transferor will be liable to tax of £21,000.

While it is not always possible, care should be taken in selecting the assets that are transferred so that any gains can be mitigated, either by reliefs or by losses arising on the transfer of other assets in the same or earlier year. If this is done early, it can help shape negotiations between the parties, avoiding unnecessary delays which can trigger additional fees.

Expert opinion on tax consequences is frequently only sought very late in the day. The earlier the tax issues are understood, the sooner a settlement can be agreed.

 

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Areas to be aware of

• Date of separation

• Former matrimonial home

• Dry tax charges on transfer of assets – most commonly property

• Pensions – can be easily dealt with under new rules

• Investments portfolios pregnant with gains and losses

• Qualification of business interest for relief

• Offshore interests

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Financial planning and pensions post divorce

In some cases we have assisted with the collection of information about pension plans, or interpreting and challenging the data provided by pension companies.

We have successfully challenged the 'cash equivalent transfer values' quoted by defined benefit (final salary) pension schemes which has clear benefits to
both parties, and advised how product features such as guaranteed annuity rates or exit penalties will impact the division of assets.

Furthermore it is an opportunity to use lifetime cash flow planning to estimate how a proposed settlement might perform in practice, allowing different options to be plotted and compared. This can be particularly helpful when one of the divorcing parties has never had to think about living off their investments and pensions in the past.

Once settlement is reached, financial planners can assist in the process of implementing court orders, both in pursuing their prompt and accurate execution, and providing ongoing planning advice to ensure a settlement operates as intended over the long term. Most defined benefit schemes require the individual receiving a sharing order to transfer funds out of the scheme and into a personal pension.

This requires advice to recommend a suitable plan to receive the funds; investment advice appropriate to the individual's attitude to risk; capacity for loss and long term income objectives; and plans for how income will be drawn (whether to use drawdown pension or an annuity purchase for example).

At every stage, the best planners concentrate on the practical needs of the individual. How much income do they need to live off? When do they plan to retire? How long might a lump sum sustain a certain standard of living given different assumptions of investment growth? How might this be affected if they purchase a cheaper or more expensive home?

Cash flow planning can help this process. It can take emphasis away from pension products or investment types, help identify potential shortfalls in income, test whether a client's objectives are realistic and achievable, and focus on an individual's specific needs.

One of the main barriers to appointing a financial planner is the difficulty in evaluating the quality and abilities of an individual or a firm. An adviser who concentrates solely on the investment advice without taking into account a client's whole circumstances, or who uses other services as a loss leader to secure the investment mandate, should sound alarm bells. However, what other factors should be considered when choosing a planner?

Independent, qualified or restricted?

A good starting point is determining whether an adviser is independent or restricted. The criteria for maintaining independence were tightened in 2013, and advisers who style themselves as 'whole of market' are not necessarily independent. Solicitors in particular must ask any prospective planner whether they are truly independent under the current definitions.

2013 also saw increased minimum qualification levels. Many advisers have gone beyond the minimum obligations and attained Chartered Financial Planner status from the Personal Finance Society, or Certified Financial Planner accreditation from the Institute of Financial Planning. Although by no means a definitive test, chartered or certified status can be a good indicator of a professional adviser at an individual or corporate level.

Finally, and crucially, you must be satisfied that you understand the fees an adviser charges and the level of service to be provided in return. It is no longer possible to pay commission on investment products, although many advisers and planners still set charges based on percentage investment values.

This is entirely appropriate in many circumstances, but advisers may choose to charge either a fixed fee or time based charges, so clients must be certain they appoint someone who is appropriate for their needs.

Beware those who offer additional services, such as cash flow planning, at reduced prices or for free. Are they really interested (or experts) in these areas, or is it a 'hook' to secure assets under management?

Similarly, be certain what services annual fees are paying for. Again this is likely to be a percentage of the value
of investments (usually in the region
of 0.5 per cent to 1.0 per cent p.a.)
but how many face-to-face meetings
can clients expect?

Will these reviews simply check the performance of investments, or will they update the over-arching financial plan, taking into account any changes in a client's financial circumstances?

A good adviser will prove enormously valuable in assisting a client through and beyond the divorce process.

Asking the right questions and following these few simple tests will
start the proceedings, save time and make sure important details are not left to the last minute.

Paul Smethurst and Thomas Adcock are Chartered Accountants and Joe Hawes is a Chartered Financial Planner from chartered accountancy firm Carter Backer Winter 

 

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