Tax  

How divorcing couples are affected by tax

  • Describe some of the tax implications of divorcing couples
  • Explain the implications of Capital Gains Tax
  • Describe when Principal Private Residence relief applies
CPD
Approx.30min
How divorcing couples are affected by tax

For couples facing divorce, the tax consequences of their financial settlement are unlikely to be at the forefront of their minds.

Nevertheless, the implications of failing to take good tax advice can have a significant impact on a couple's finances at a time at which they are likely to be under pressure anyway. 

Changes being made to aspects of the capital gains tax regime with effect from 6 April 2020 may also affect the tax analysis.

Number of couples divorcing, England and Wales
YearNumber
2018    91,299
2017  102,007
2016  107,071
2015  101,077
2014  111,169
2013  114,720
2012  118,140
2011  117,558
2010  119,589

Source: ONS

Thus, anyone considering separation or divorce should seek tax advice as early as possible.

Specialist advice should always be taken where one or other party is domiciled outside the UK.  

Please note that we refer throughout this article to spouses, but all the issues touched on apply equally to civil partners.

Capital Gains Tax

The most significant tax consideration in the context of separation or divorce is likely to be a potential capital gains tax (CGT) liability when assets are sold or transferred from one spouse to the other as part of a financial settlement. 

For many couples, the marital home is likely to be the most valuable asset to be considered in a divorce, but other assets and investments, including second homes, may also be significant in any financial settlement.  

Outright transfer between spouses

Timing is the key here. 

Assets of all types that are transferred between spouses during a tax year in which they have lived together at some point, pass on a "no gain, no loss" basis, so the recipient spouse is treated as receiving the asset at the value at which the transferring spouse acquired the asset. 

However, if such a transfer takes place in a tax year after the couple has formally separated, assets will be treated as passing at market value, and accordingly any gain in value since acquisition will be taxable on the transferring spouse, subject to any available relief.

This is despite the fact that there may have been no financial consideration involved from which the tax might otherwise be paid.

As the CGT liability arises to the person disposing of the asset (the transferring spouse) one might argue that the recipient spouse has little interest in timing the transfer to avoid a CGT charge. 

However, it is generally in the interests of both spouses to minimise the tax payable in order to maximise the pool of funds available to be shared between them.

While tax will not be the only relevant issue, if it is possible to ensure that any transfer of assets between spouses is made in a tax year in which they have lived together, in most cases this is likely to be preferable. 

If not, then negotiations of any financial settlement should always take into account any prospective CGT liability of either or both spouses, in respect of transfers of assets between them.

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. When is Capital Gains Tax likely to hit during a divorce?

  2. Assets that are transferred between spouses in which they have spent part of the year living together are not likely to be hit by CGT, true or false?

  3. When can principal private resident relief be applied?

  4. Why are inheritance tax implications of divorce limited?

  5. What happens to the spousal exemption if one spouse is UK-domiciled and the other is not?

  6. Transactions in connection with divorce are generally exempt from Stamp Duty Land Tax, true or false?

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You should now know…

  • Describe some of the tax implications of divorcing couples
  • Explain the implications of Capital Gains Tax
  • Describe when Principal Private Residence relief applies

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