In April 2022, the rules on divorce changed and blame no longer needs to be attributed to one party. Instead, all divorces are now ‘no-fault’ with the intention that it makes the process slightly easier from a legal perspective.
However, the tax implications are still just as complex and, whilst it’s unlikely to be at the forefront of anyone’s mind when considering divorce, getting advice at the right time is key to reducing any liabilities and ensuring the transfer or sale of assets is done in the most efficient way possible.
There are three key taxes that are impacted by divorce – Capital Gains Tax, Inheritance Tax and Income Tax. Below is a summary of the key issues of each.
Capital Gains Tax
A married couple who are living together can pass assets from one another without incurring any capital gains tax (CGT). This still applies once a couple have separated, but only during the tax year of separation.
From the 6 April following the tax year of separation, the transfer of assets can create a disposal for CGT, even if you are still legally married. As you are deemed to be “connected” for CGT purposes, the gain is calculated based on the market value of the asset on transfer even though, in many cases, no cash consideration has been received.
For this reason, any transfers of assets should be planned carefully and where possible during the tax year of separation to reduce any CGT payable. Although practically this can be very difficult to arrange.
Divorce also has implications for CGT reliefs such as Private Residence Relief (PRR) and Hold Over Relief.
PRR is a CGT relief that means when you sell your only main home, no CGT is payable – as long as you have lived there as your main home throughout the period of ownership. The last nine months of ownership is also treated as a period of occupation.
However, this means that the spouse who leaves the marital home, can have CGT to pay if they sell or transfer the property at a later date. The only exception to this is where there is a court ordered transfer of interest in the property to the other spouse. In this case, the transferor PRR is extended from the date they moved out to the date of transfer. There are certain conditions and restrictions for PRR that should be carefully looked at on an individual basis whether the transfer is under Court Order or not.
Added to this potential tax liability is the need to now report the gain to HMRC and pay any CGT within 60 days of completion, and then report it again on a self-assessment tax return. All other transfers resulting in CGT should be included on your self-assessment tax return.
Inheritance Tax (IHT)
As a married couple, a spouse can transfer assets to the other spouse tax free and this rule still applies until the Decree Absolute is signed.
After the Decree Absolute has been signed, certain transfers under Court Order may be exempt from IHT along with maintenance payments. But this should be reviewed as there are specific conditions that need to be met.
Income Tax
Although the transfer of assets is not ordinarily subject to Income Tax, you may have been given assets that produce income, such as shares or interest-bearing bank accounts, and you may now need to complete a tax return.
If you are in the process of, or thinking about, a divorce or separation and would like some tax advice regarding any of the above, please get in touch with your usual BHP contact or Suzy Harris-Milnes.
