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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Approx.30min
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How divorcing couples are affected by tax

However, where an ongoing trust is created, including a deferred trust of land depending on its terms, there may be a risk of future IHT charges arising. 

Therefore, it is important that IHT advice is always taken as part of any financial settlement.

For couples where one spouse is UK domiciled and the other is not, the spouse exemption is limited to £325,000 (in tax year 2019/2020) for transfers from the UK domiciled spouse to the non-UK domiciled spouse. 

Any sum transferred in excess of that amount will be treated as a "potentially exempt transfer" and will also be exempt from IHT provided the transferor spouse survives for seven years following a transfer.

Taper relief is available to reduce IHT liability in respect of transfers made between three and seven years prior to the death of the transferor.

While the IHT implications of separation or divorce itself may be limited, once any financial settlement is finalised, both parties should take their own estate and tax planning advice to ensure that their wills and other financial arrangements are updated to reflect their new status and to be as tax-effective as possible.

Income Tax

As married couples are taxed separately on their income, the tax implications of divorce are generally limited to any income-producing assets that are transferred as part of the financial settlement. 

However, everyone's circumstances vary, and it is important always to take advice.

Stamp duty land tax

Stamp Duty Land Tax may be payable on transactions involving land, including the purchase of a residential property. 

Transactions in connection with divorce or dissolution of civil partnerships and made in pursuance of a court order of divorce, dissolution or separation are generally exempt from SDLT. 

This would include transfers of the family home between spouses.

However, SDLT will be payable on acquisition of any new residential property, for example if the non-occupying spouse decides to buy a new property in which to live.  

In normal circumstances, the acquisition of a property (or "dwelling") while also retaining an interest in another one (for example, in the family home) would give rise to an additional SDLT charge at the rate of 3 per cent of the value of the property. 

This charge would be payable in addition to the standard rates of SDLT.

However, where a couple is getting a divorce, a spouse who owns an interest in a dwelling in respect of which a property adjustment order has been made for the benefit of another person is not treated as owning that interest for the purposes of the additional charge, provided that the dwelling is not his or her main residence, but it is the other person's main residence.  

Conclusion

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