When it comes to dividing your assets, there’s more to consider than simply who gets what. There are tax implications to consider too. Poor tax planning can mean less assets to divide between you, so often it can be wise to get an expert to advise you on the best way to go about dividing your assets, so you don’t pay any more tax than absolutely necessary.
Below is just a summary of some ways that tax can affect a divorcing couple.
Timing
For married couples, the timing of separation is important. Transfers of assets between spouses in the tax year of separation are usually exempt from capital gains tax (CGT); so if you separate on 6th April, you will have a whole year to transfer assets without CGT implications. Separating on 5th April, however, with a transfer of assets following that, could cause CGT to arise. Important to note is that It is the date of separation which is relevant and not the date of the divorce.
For many divorcing couples, it is advisable to wait until a financial settlement has been approved by the court before applying for the marriage to be dissolved, as otherwise this could have unintended tax consequences for either party.
Property
The biggest issue for most couples is the family home. You may decide to sell this or one party may buy the other out.
If ownership of the property is transferred to one of you, and the other has not elected another property as their main residence, then there should be no tax consequences, even if this occurs outside of the year of separation.
However, if you’re the partner who moves out and you purchase another property, that can become your main residence. Consequently, a proportion of the profit or gain relating to your ownership of the family home may be liable to CGT on a later sale.
This is a complex area and advice from an accountant is definitely worthwhile on these tricky issues.
Pensions
It’s easy to forget about these – and many people don’t even know what pensions they’ve paid into and will be entitled to. While transfers of pensions between spouses aren’t taxed, when the funds are released they are subject to income tax.
If you receive part of your spouse’s pension in a divorce settlement, you will need to think about the tax you will pay on this when the funds are released to you on retirement.
Conversely, those with a large pension and lifetime allowance issues may find their tax situation alleviated by part of their pension passing to their spouse as part of the divorce.
Expert financial advice is needed to deal with these issues in advance of any settlement being agreed.
Inheritance Tax
Transfers between partners during the separation period and up to the Decree Absolute are generally not subject to Inheritance Tax (IHT). However, even after this point, some transfers are still allowed exempt of tax by HMRC.
As we have said above, the timing of dissolving the marriage is important to avoid IHT problems.
The bottom line is that expert advice from an accountant, IFA or lawyer is needed in most cases regarding the timing of any transfer of assets and in the long run this is almost always cost effective and avoids any nasty tax surprises!
