When a marriage or civil partnership breaks down, tax is not usually at the top of the agenda. However, the impact on tax impact should not be underestimated. Advice should be sought early on to ensure that there are no unexpected tax consequences when you divorce. These might arise from changes in legislation or HMRC interpretation, and may mitigate any resulting tax liabilities. See here for Inheritance Tax Planning
When a married couple divorce, the matrimonial assets will usually need to be divided between both parties. Depending at what stage of proceedings the assets are transferred or disposed of, this division of assets could give rise to capital gains tax (CGT) liabilities.
Capital Gains Tax
Transfers of assets between spouses or civil partners do not usually result in a CGT charge. Instead, the assets are deemed to be transferred at a value that results in neither a gain nor loss. However, this rule only applies to spouses or civil partners that live together at some point during the tax year. At any other time, transfers between spouses or civil partners will be deemed to be made at market value.
Spouses or civil partners are treated as living together unless they are separated under a court order. This is by deed of separation or where the split is likely to be permanent. In either of these instances, the no gain/no loss rule ceases to apply at the end of the tax year of separation. It does not just continue until the couple are actually divorced. Consequently, if a couple permanently separate at the beginning of the tax year (6 April), they will still be able to transfer assets CGT-free right up until the end of the tax year. Conversely, where a couple permanently separate at the end of the tax year there will be little time to transfer assets CGT-free; obtaining tax advice is important.
Following the end of the tax year in which you separate, any transfers are deemed to be at market value. This is because the divorcing couple will still be ‘connected persons’ up until the decree absolute which is now called a final divorce order .
It is also worth noting that special rules apply to losses arising on assets transferred to a recipient spouse in this period. These losses are referred to as ‘clogged losses’. They can only be utilised against capital gains on assets transferred to the same individual while they remain connected. It is therefore important that tax advice is sought early in the divorce process. You will want to mitigate any exposure to CGT and avoid capital losses being wasted.
The Family Home
In many cases, the family home will form a significant part of the overall family wealth. However, its immediate sale to realise capital may not be possible or practical. Consequently, it is important to consider potential tax issues when it is sold or transferred at a later date.This is particularly the case when the transferring spouse or civil partner has already left the marital home.
Generally speaking, gains arising on the disposal of an individual’s main residence are exempt from CGT. The same applies for a divorcing couple where that property has been their main residence throughout its ownership. However, where one spouse moves out of the matrimonial home and buys or rents a new property then their main residence will change. Here, relief will still be available for a period of 9 months after they moved out. Any disposal or transfer taking place after this 9-month period could give rise to a CGT charge.
In certain cases, it is possible for this 9-month period to be extended. But the property must be transferred to the occupying spouse as part of the divorce settlement. The claim cannot be made where the departing spouse has elected for another property to be treated as their main residence. Therefore, careful consideration will be required before any main residence is elected by the departing spouse.
Inheritance Tax UK
Inheritance Taxis the tax you pay in the UK on the estate (the property, money and possessions) of someone who has died. Inheritance Tax is complicated but in the most simplest of terms there is usually none to pay if,
- The estate is below the IHT threshold of £325,000
- You leave everything above £325,00 to your spouse, civil partner, charity or community sports club
- IHT rate above the threshold is 40%
However, there are many complications and similarly many ways to reduce your liabilities with careful Inheritance Tax planning. When you die any assets left to your spouse are exempt. Their IHT also rises by the amount of your allowance not used. Inheritance tax planning needs to go underway upon divorce.
Inheritance Tax Planning
Transfers between spouses are exempt from inheritance tax in the UK. This continues throughout the period of separation up until the final divorce order. This is different to the CGT position noted above. Careful estate planning can help you avoid Inheritance Tax UK.
For couples where one of the spouses is not UK domiciled, the maximum that can be transferred from the domiciled spouse to the other is £325,000. Any transfers over that amount or made after the decree absolute will be treated as ‘potentially exempt transfers’ in the absence of any other Inheritance Tax Planning reliefs being available.
Transfers made after the decree absolute may not be ‘transfers of value’ if they are between, or for the benefit of, the spouses and either the gift was not intended to confer any gratuitous benefit or was made for the maintenance of the transferor’s family. Likewise, transfers made following a court order, including the creation of settlements, are not usually ‘transfers of value’. Specific advice should be obtained before any action is taken in relation to this area.
For Inheritance Tax Planning advice get in touch today. Our specialist r Inheritance Tax Planning advisors will work out if you are likely to need some help. If so we can put a plan in place for legally avoiding Inheritance Tax planning bills. You can potentially saved thousands of pounds.
Married couples are taxed independently of each other. Divorce should not have any particular impact on an individual’s income tax position. However, careful consideration will be required on the income tax consequences of any income generating marital assets upon divorce.
Maintenance payments generally fall outside the UK tax system and so are not taxable on the recipient. At the same time they are not tax relievable for the payer.
The tax implications arising from divorce can be diverse and will largely depend on when assets are transferred. Seeking advice early on in the divorce process is recommended to ensure assets are transferred as tax efficiently as possible and to avoid any unexpected tax liabilities.