The summer break can be a testing time of juggling work and family commitments, and lawyers have seen an increase in divorce applications peak after the summer stress. The tax impact of separation and divorce can often be overlooked, but considering the division of assets early and taking appropriate tax advice will be key to avoiding large sums being unnecessarily paid to the tax man.
For those in the know, separation on or shortly after 6 April will provide couples the most time to organise their joint affairs. The income tax and inheritance tax (IHT) implications of divorce should be considered, but are usually limited. However, the capital gains tax (CGT) implications following permanent separation can offer opportunities for planning or unexpected liabilities, particularly if it takes time to agree on the separation of assets.
General CGT principles
When a couple are married or in a civil partnership, assets can be transferred between them on a nil gain, nil loss basis, meaning that no taxable gains arises on the transfer. This spouse exemption ends at the end of the tax year following separation. This is an important distinction as the CGT spousal transfer rules might not apply in the tax year of divorce if separation happened in an earlier tax year. Identifying the date of separation is the first stage in identifying the tax implications on divorce.
If assets are transferred after the tax year of separation, the couple are still connected persons, the transfer will be deemed to take place at market value and a CGT disposal will also take place. Each person has an annual exemption (£11,300 for 2017/18) and after this amount the gain will be taxed at 10 per cent for basic rate taxpayers or 20 per cent for higher rate taxpayers. If the asset disposed of is residential property, then the applicable tax rates are 18 per cent and 28 per cent respectively.
Key points
- Considering the division of assets early in divorce and taking appropriate tax advice will be key.
- Tax implications are likely to change the longer a couple is separated without final agreements.
- Taking appropriate legal advice as well as tax advice on separation can make a significant difference to the overall tax position.
Former spouses cease to be connected persons once decree absolute has been issued. Transfers after decree absolute will be for actual consideration, if any, rather than market value. The date of disposal needs to be reviewed as this can vary depending on the timing of the court order and the decree absolute.
Principal Private Residence Relief (PPR)
