Taxation on separation and divorce

Tax is not always at the forefront of a couples mind when dealing with the unpleasant business of a separation or divorce. However, if ignored there could be unintended consequences and costs on the division of assets.

Whilst married, assets can be transferred between spouses with no capital gains tax payable. This particular relief does not end on the grant of a divorce order but at the end of the tax year in which there is a permanent separation of a couple. Therefore a couple separating on 5 April will have little time to organise their affairs in a tax efficient manner.

When looking at the matrimonial home it is important to firstly establish who owns the property. Only then can you decide who is disposing of what and to whom. If the property is sold within 18 months of one or both spouses vacating the property then full principal private residence relief (PPR) will be available and no tax will be payable on the sale. If one spouse remains in the property while the other leaves then there is a possibility of the departing spouse claiming PPR on a transfer to the resident spouse after a period of 18 months provided the departing spouse does not wish to claim PPR on any new property purchased. To qualify for relief the matrimonial property must be transferred to the spouse and not be sold to a third party. Trusts may be useful to mitigate the tax in some situations.

The transfer of other assets in the tax year following the year of separation may be subject to capital gains tax (CGT) depending on the type of asset and whether any specific reliefs are available. It is important to establish the date of disposal, for example, the date of the settlement agreement or the date an asset is physically transferred. The date of disposal may also determine the consideration or deemed consideration received as prior to the granting of a divorce order the couple are still ‘connected’ for CGT purposes and a transfer will be deemed to take place at market value.

Business assets may qualify for ‘hold over’ relief which enables the gain to be deferred until the recipient sells the asset, but if the divorce is not amicable the recipient may refuse to sign the necessary claim form. Where several properties are jointly owned, other than the matrimonial home, it may be possible to relieve any gain where joint interests are exchanged for a sole interest in the properties.

For inheritance tax (IHT), transfers between spouses in lifetime and on death are exempt. Unlike CGT it does not matter if the couple are living together or not, the exemption will only apply until the date of the divorce order. Following divorce it is not possible to benefit from the unused nil rate band of an ex-spouse.

Finally, despite the introduction of independent taxation in 1990 there are still some income tax implications of marriage, the ability to transfer surplus personal allowances which was re-introduced in a limited form in 2015, and the impact on child benefit income where one spouse earns over £50,000 per annum which was introduced in 2013 should not be overlooked.

For further information or advice, please contact one of our EQ Professions specialists via professions@eqaccountants.co.uk or call your local office contact.