Taxation issues are usually the least of a couple’s worries when they are starting the process of separation. However, once the dust has settled and the sometimes lengthy process of asset division has begun, taxation implications can come to the fore.
Where an asset has appreciated in value and is subsequently disposed of, capital gains tax (CGT) is usually payable. Transfer of property between spouses benefit from a “no gain, no loss” basis for CGT. However, this CGT exemption only applies in the tax year of separation and not after, irrespective of whether the divorce has been finalised. Between separation and divorce, they are treated as connected persons and any transfers of assets between them must be at deemed market value. It is therefore imperative to attend to the issue of asset division and taxation as soon as is practically possible. The most common areas which affect our clients relate to the following:
Family home
Where the family home is your only/main residence throughout your period of ownership, you will be entitled to full principal private residence relief (PPR), from any CGT. PPR is limited though, and once one spouse moves out of the property they have 18 months before their share of the property could be exposed to some CGT.
Separate from CGT, there is an exemption to Stamp Duty Land Tax (SDLT) on transfers of any property directly connected to the divorce; there is no time limit on this exemption.
Family business
Spouses commonly hold interests in family businesses, particularly with all the husband and wife tax planning which has taken place over the last few years. The tax exemption between spouses will apply in the year of separation. Restructuring of the business or the company might be required to minimise the tax leakage and it may be necessary to take advantage of other tax reliefs, such as gift relief or Entrepreneurs’ Relief depending upon the circumstances.
Investment property
The Courts often want to know the options available in respect of the potential division of jointly held investment properties. Therefore the inherent capital gains often have to be calculated. Tax reliefs might be available in some circumstances such as an exemption for the exchange of joint interests in property.
Chattels
Chattels are tangible, moveable items of property (furniture, paintings, household goods, jewellery, vehicles etc.). Private cars are exempt from CGT and so would not present a problem on transfer. Other chattels only need to be considered from a tax perspective if they are valued at more than £6,000 and on which there is a gain.
Tax credits
The divorcing couple may not have had to consider tax credits before, or they may already be reliant on them. If they are new to tax credits, they should apply as soon as possible as a claim can only be backdated by 3 months. If an individual is already claiming, they must notify HMRC within 3 months following the change in their personal circumstances.
Inheritance Tax (IHT)
Unlike for CGT, for IHT purposes, it is the date of the decree absolute that triggers the change in tax treatment. It is also worth emphasising that wills should also be considered when separation takes place, as a divorce will invalidate an existing will.
Separation and divorce can be an extremely stressful time in a person’s life. Sadly, particularly with acrimonious situations, we see a lot of asset division cases taken to court to determine the settlements. As with a lot of court cases, this process can be lengthy and the opportunity for tax savings (i.e. in the year of separation) has often passed. We are still able to help mitigate tax issues in these instances, and by advising on the tax implications of potential settlements, we can help to ensure an appropriate outcome, without any nasty tax surprises.