TaxFeb 24 2020

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
  • 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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CPD
Approx.30min
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CPD
Approx.30min
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CPD
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How divorcing couples are affected by tax

PPR is not available for transfers of second homes, and the only relief from CGT in this case, or in respect of other non-business assets, would be the individual's annual exemption (£12,000 in tax year 2019/20), if available.

Deferred trust of land

Courts do not always order an outright sale or transfer of the family home. 

Instead a "Mesher" or "Martin" order may be made, whereby the property is held in both parties' joint names on trust until a specified event occurs, for example (in the case of the former) the youngest child reaching 18 or leaving education. 

Until that point, the occupying spouse has the right to reside in the property.

For tax purposes, the two spouses are regarded as making a disposal into trust at the date of the court order in respect of which PPR is available.

When the property is later sold, provided the conditions to extend the period of absence apply, PPR should be available to the non-occupying spouse, if he or she wishes to claim it, regardless of the period that may have elapsed since he or she left the property.

From an IHT perspective, the creation of a trust under either a Mesher or Martin order should have no immediate adverse effects provided it is entered into before the decree absolute or dissolution order. 

However, IHT is discussed further below.

Deferred charge

A deferred charge differs from a Mesher or Martin order in that the property moves into, or remains, in the sole ownership of the occupying spouse. 

The interest of the non-occupying spouse is represented by a charge over the property.

This charge is enforceable on the occurrence of a specified event, again likely to be the youngest child reaching 18 or leaving education. 

The charge is either a percentage of the eventual sale price or a fixed sum.

Generally, a percentage is considered preferable in order to permit the non-occupying spouse to share in any increase in value of the property in the intervening period. 

The CGT analysis will vary according to the alternative chosen and tax advice should be taken before any decision is made.

Inheritance tax

For most couples, the inheritance tax (IHT) implications of divorce are limited, as any transfer of assets between them should be covered by the spouse exemption, provided it is made before decree absolute or a dissolution order. 

Even after that event, transfers are likely to escape an IHT charge on the basis that they are not intended to confer gratuitous benefit, for example, because they take place as a result of a court order or compromise agreement between the parties. 

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