Are there any tax issues I need to consider when separating or divorcing?
Separating from your long term partner can be a tricky time and in most cases stressful, particularly if you don’t know what the future holds with everything to be agreed or determined.
Even when couples have parted on relatively amicable terms, and have reached a tentative agreement as to what they wish to do or have an idea of how they will divide assets between them, frequently no consideration has been given to the tax consequences of their separation.
It is absolutely vital to take independent advice from your financial advisor, but I set out below briefly, just some of the things you may wish to consider:
Capital Gains Tax liabilities when divorcing
When a married couple decide to transfer assets between themselves – for example, you may decide during the marriage to transfer a rental property into the sole name of your spouse who is not working to fully utilise their tax free allowance – such a transfer is treated by HMRC as “no gain, no loss” meaning there is no Capital Gains Tax liability.
When divorcing, that rule continues to apply to the tax year of separation. On the face of it that seems relatively straightforward, but it literally means the ‘tax year’ not a full year, so if a couple ‘separate’ in late February/early March, there is only one month to effect a tax free transfer, unlike a couple who separate on 6th April who then have a whole year to deal with a transfer of assets. Whilst there may still be some tax relief whilst you remain married in the next tax year it is still quite important in some cases to take advice early on to work out what the tax liabilities for one or both of you may be, and how best to deal with these.
The Family Home
Even if remain married but one of you vacates the family home whilst you are resolving matters, then another consideration, often overlooked, is that there is limited period in which you can claim Principle Private Residence Relief on any potentially taxable gain you may otherwise be liable for. This is available when a property has been your only or main residence during the preceding nine months. When you have a number of properties, only one property can be nominated as your main residence so it is important to think about this if you do have several properties.
There are special rules applicable when a husband or wife transfers their interest in the family home pursuant to a court order upon divorce, and the time limits for claiming Principle Private Residence Relief may be extended.
Sometimes, you may retain an interest in the family home whilst your ex partner or spouse continues to live there, for example because it is necessary to house your children. It can be many years before your interest is realised. It is therefore quite important to take specialist advice about this to know what liability you may have at that point.
Business Assets
Sometimes, upon divorce, it is necessary to transfer business assets from one party to the marriage to the other. In some cases, there may be Hold-over Relief so as to reduce the amount of Capital Gains Tax payable when the business asset is finally sold to a third party at a later date.
Again, taking specialist advice before reaching an agreement is vital so that you are fully aware of what your tax liabilities may be, whether immediately or in the future.
Other Tax considerations
There are also some other things you may need to think about if you are divorcing and what will happen when the divorce is finalised. This includes inheritance tax planning and your own personal income tax liability.
If following a divorce or separation you receive an income producing asset, you will at that point be liable to account to HMRC for all income received. It may be easy to lose sight of this when dealing with the division of assets following separation so it is important to take specialist advice or consider what your actual net income will be and how your income tax liabilities may change.
Any transfers of assets during marriage are generally speaking not liable for inheritance tax and this continues whilst you are separating until the point that the divorce is finalised (that is a final divorce order obtained or ‘Decree Absolute’). If there is a court order dealing with the transfer of assets, this is likely to still be exempt from inheritance tax but the ability to utilise your spouse’s nil rate inheritance tax band is lost.
If you are at the point where you are contemplating divorce or separation or would like further information about these issues then please get in contact with us.
