In this episode we will discuss the tax implications associated with separation and divorce. Tax probably isn’t the first thing you would think about when your relationship is breaking down but timing will be key. Do not get unnecessarily caught out. Enjoy.


Natasha 00:25
Hello and welcome to Tax Able. Today’s episode is called Consciously Uncoupling, and that’s because we’re going to discuss the tax implications of separation and divorce. The taxes we’ll cover today are capital gains tax, stamp duty, land tax, inheritance tax, and income tax. The one thing you need to remember with separation and divorce is that timing will be key.


Natasha 00:46
When a marriage or civil partnership breaks down, it’s not likely that tax will be at the top of your agenda. However, the tax impact should not be underestimated. I will refer throughout this episode to spouses but all of the issues and topics touched on will apply equally to civil partners. When a couple separates, it’s likely that the matrimonial assets need to be divided between the two parties and depending on what point you are at in the divorce proceedings, when the assets are transferred or disposed of, the division of these assets will give rise to various tax liabilities.


Natasha 01:21
So, the first one we’re going to look at is capital gains tax. Transfers of assets between spouses do not normally give rise to capital gains tax by a rule called no gain no loss. This means when the transfer is made to your spouse, no gain is made on the sale or no loss is made on the sale. However, this rule only applies to spouses that are living together at some point during the tax year. At any other time, the transfer is deemed to be made at market value. You are treated as living together unless you’re separated under a court order by deed of separation or whether separation is likely to be permanent. This last classification is key.


Natasha 02:05
In any of these instances, the no gain no loss rule ceases to apply at the end of the tax year separation rather than continuing on until you’re actually divorced. This is why timing is key, and I’ll demonstrate this through an example. If a couple permanently separates at the beginning of a tax year and remember the beginning is the 6 April, then they’re able to transfer assets without triggering capital gains tax up until the end ofthe tax year, which is the following April. However, if a couple permanently separate at the end of the tax year, which remembers the 5 April then there will be little to no time to transfer any assets without triggering capital gains tax. This is why obtaining timely advice will be essential.


Natasha 02:51
But what do you do with the family home? Well, an immediate sale may not be possible or practical, but you will need to consider the potential tax consequences when the asset is later sold or transferred. Particularly if a transferring spouse has already left the home. In general, gains arising on the disposal of an individual’s residence will be exempt from capital gains tax due to a relief called private residence relief, or you may have heard it called PPR.

Natasha 03:21
The same applies for a divorcing couple where the property has been their main residence throughout the whole period of their ownership. However, it gets a bit tricky if one spouse moves out as a matrimonial home and they need to buy or rent a new property. This new property will then become their main residence. In this instance, relief will still be available for the days they occupied their previous home as a main residence. They also get nine months after they’ve moved out. If the divorce or sale is dragging on and by that I mean longer than nine months, it could trigger a capital gains tax charge for the spouse who left the home. In certain cases, it may be possible to extend this nine month period, but conditions must be met but it’s best you discuss this with your advisor.


Natasha 04:08
We’ve covered capital gains tax, but what about the other tax which is triggered on the transfer of a property and that’s stamp duty land tax? Usually, the transfer of properties between divorcing couples will be exempt from stamp duty land tax, and this is because there is a special exemption, provided the transfer has been ordered by a court or is made in conjunction with any agreement between the parties in contemplation or connection with their divorce. This is the case whether the transfer is made before or after the divorce and regardless of whether any money has changed hands.


Natasha 04:41
If there’s no such agreement in place, then stamp duty land tax is chargeable and the amount of tax is due on the consideration given, and this includes any cash that’s changed hands or any amount of debt that has been assumed. If one party has left the marital home, then it’s likely that they’re looking to buy a new property. When they are purchasing this new property their interest in the marital home can then trigger the 3% surcharge.


Natasha 05:09
The reason the 3% surcharge is triggered is because it’s chargeable on second homes. In order to prevent this surcharge from being triggered, you need a disposal of a previous main residence within a certain window. Obviously, if the marital home has not yet been transferred or disposed of, then the 3% surcharge will apply as you’ve not made your disposal. But when the disposal is made, you can then seek to reclaim the 3% from HMRC. It just may affect your cash flow.


Natasha 05:41
The next tax we’re going to look at is inheritance tax. Transfers between spouses are exempt from inheritance tax and this continues throughout the period of separation up until the decree absolute and this is in contrast to the capital gains tax position we discussed earlier. If one of the spouses is not UK domiciled then you will need specialist advice as it does get a bit complicated.


Natasha 06:05
The last tax we’re going to look at is income tax. Married couples are taxed independently of each other so divorce should not have any particular impact on an individual’s income tax position. However, consideration is required if you have any income generating assets and that means things like shares or rental properties as these all need to be transferred as part of the divorce settlement. Where you have these types of assets. This could affect your income tax status for the transferee as it may potentially move you into a higher tax band if any jointly owned assets continue to be owned jointly following the date as permanent separation.


Natasha 06:46
The income tax liabilities will then need to be calculated in reference to the exact percentage of ownership. When you are married you are automatically given an equal share in a property as that is the default position. Any household income charges could affect your eligibility for tax credits for child benefit. Maintenance payments generally fall outside the UK tax system and this means that they are not taxable on the recipient and at the same time they are not tax relivable for the payer so they do not form part of your income tax returns.


Natasha 07:18
We’ve now got to the end of the episode and what should you take away from today? Well, if you are thinking of separating, timing will be key. If you can avoid doing this really close to the end of the tax year, please do as it will work in your benefit. You need to get timely advice to avoid triggering unnecessary tax liabilities. If you have enjoyed today’s episode please make sure you click subscribe to listen to episodes as they are released.


*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Please visit my disclaimers page. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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