One week on from The Chancellor’s Autumn Budget, and the headlines focus on tax freezes, benefit reforms, and property levies. However, the ripple effects on family law are just as significant. The outcome of the budget could reshape financial settlements, spousal maintenance, and housing arrangements for separating couples. In this blog, I address what the Budget means for couples going through divorce proceedings and why understanding these changes now could save you time, money, and stress further down the line.
Property and Financial Settlements
“Mansion Tax”
The Budget has introduced what is labelled “mansion tax” whereby those who own properties in England valued at £2 million to £2.5 million will be subject to a surcharge of minimum £2,500 from 2028, rising to £7,500 for properties worth £5 million. Whilst this tax does not come into effect until April 2028, it is a key consideration that will need to be factored into financial settlements and negotiations from now on, whether parties are mid-divorce, or divorce at some point in the future.
The tax acts as an additional cost of a property with a higher value and raises concerns of whether, if the financially weaker party of the marriage seeks to retain the family home, they will be able to afford to do so. Parties may want to pursue claims for spousal maintenance to cover the increased costs of living associated with this surcharge, which is reported to be charged annually. There are reports that there is opportunity to defer to the charge until death, and for the charge to be paid on the distribution of the estate. It will be key for parties to take independent financial advice should they want any settlement to not implicate the beneficiaries of their estate later down the line.
When property values are considered for the purpose of disclosure and negotiations for settlement, the property valuations will need to be subject to scrutiny to ensure the mansion tax is factored into the settlement of the high value cases.
Frozen Tax Thresholds
The income tax and national insurance thresholds remain unchanged following the recent Budget. Incomes will continue to rise in line with inflation, and yet the tax thresholds stay the same.
This will have a fiscal drag effect, whereby an individual’s income rising tips them into a new tax bracket. This will impact the disposable income of individuals and in term affect the affordability when assessing housing needs in settlement cases and influence any maintenance calculations that may arise.
Pensions
Whilst Family Lawyers are not pension experts, pensions are often seen to be the second largest asset in a divorce case, next to the matrimonial home, and so they form a key part of any financial settlement. Under the recent Budget, a cap has been placed on the salary sacrifice on pensions at £2,000. This reduces tax efficiency for higher earners. Family lawyers and pension actuaries will need to take this into consideration when considering equalisation of value of pensions and income. There will be uncertainty about the effect of this until we know for certain how this cap will work.
The Two Child Limit
The Budget has confirmed that the two-child benefit cap will be abolished from April 2026. This means that families in receipt of Universal Credit or Tax Credits will be able to claim the child element of these benefits for all children of the family, as opposed to only the first two.
With regards to the impact on financial settlements upon divorce, a greater household income as a result of the increased benefit receipt may influence the outcome of a financial settlement arising from divorce. A party with greater income and assets as a result of increased benefit receipt may be better positioned to meet their own needs, reducing reliance on their partner’s assets in the event that there was a consideration to move from the starting point of 50/50.
Whilst the definite impacts on the Budget will not be clear until a few months down the line, obtaining legal advice early on it’s possible implications is always a good idea.