Stairway to (Tax) Heaven

Surprising your partner with the news of an unexpected tax bill is unlikely to go down well at the best of times. For divorcing couples, the added stress can be even greater.

Particularly when a tax bill could have been avoided or minimised with good legal advice, it is simply not a burden that separating couples need.

Following the guidelines below, and seeking legal advice as early as possible, should ensure that separating couples avoid a quick descent into the underworld of expensive tax bills.

Capital Gains Tax (CGT)

Some transfers between divorcing partners could be susceptible to a CGT charge. This will depend on whether the couple has lived together at any point during a tax year.

CGT for couples living together

If the married couple, or civil partners, have lived together at any point in the tax year, they will not usually be liable to pay CGT on any asset transfers. This applies only as long as the transfers are made in the same tax year in which they lived together.

A couple is automatically considered living together unless they are separated under a court order, deed of separation or a verifiable, permanent change to one of the partners’ living situations.

If a couple separates near the end of the tax year, they will still only have until the end of that tax year. This could leave them with less time to transfer assets CGT-free, and highlights why it is important to seek legal advice as soon as possible when the decision to separate has been made.

CGT for couples not living together

If a couple has not lived together at all during any one tax year, asset transfers between the two parties will be considered at market value.

Capital losses

It is worth noting that there are some special rules which apply to capital losses that arise from assets transferred to a recipient spouse.

If losses occur when a couple is officially not living together, but before the decree absolute (which finalises the divorce), these losses must be offset against capital gains transferred to the same individual while they remain connected.

Capital losses that take place after the decree absolute risk being wasted if they are not utilised in time, potentially leading to a much higher tax bill than necessary.

Selling the couple’s main residence

In many cases, the main residence, or family home will be a significant proportion of the assets in the overall settlement.

Whilst an immediate sale, with parties not having to rent or buy elsewhere, is desirable in terms of CGT, in reality, this is not often the case.

As such, as long as both parties’ main residence does not (officially) change, gains arising from the family home are exempt from CGT.

If one party does officially move out before the residence is sold, the transfer remains exempt for 9 months after they moved out. Any disposal or transfer taking place after this risks a CGT liability.

An extension can sometimes be put in place to the 9-month exemption, but the property must be transferred to the occupying spouse as part of the divorce settlement.

Inheritance Tax (IHT)

Throughout the separation until the decree absolute, transfers between the separating partners are exempt from IHT.

This differs from the CGT liabilities explained above, and there is currently no limit to how much can be transferred when both parties are UK-domiciled.

For transfers between partners where one lives outside of the UK, the IHT exemption is limited to £325,000.

Any transfers over this could give rise to IHT charges, but this depends on the circumstance. Legal advice should be sought before any transfers of this size are made.

Transfers for maintenance and those made following a court order, including for settlements, are not usually subject to IHT. Legal advice should still be obtained.

Income Tax

As married couples are taxed independently of each other, an individual’s tax liabilities will not usually be affected. However, some income-generating assets could incur liability when transferred as part of the divorce settlement.

This depends largely on when assets are transferred (see CGT section above). It is recommended that you seek an experienced family law solicitor to ensure assets are transferred as tax-efficiently as possible. This will help to avoid any surprises in the income tax department.

Maintenance (or support) payments

Generally, maintenance or support payments are not taxed. They are also not usually tax-deductible for the paying party.

Do I pay tax on maintenance payments?

If you are the party receiving a maintenance payment, there is no tax to pay. This is because the money has already been taxed from the paying party.

Can I claim tax relief on any maintenance payments I make?

Maintenance payments generally fall outside of the UK tax system and so are not taxable on the recipient, but at the same time they are not tax relievable for the payer.

If the following points apply, the payer can claim 10% back, up to a maximum of £326:

• Either partner was born before 6th April 1935
• Maintenance that is being paid under a court order after the relationship has ended
• Payments are for the maintenance of your ex-spouse or former civil partner (unless they are remarried or in a new civil partnership)
• Payments are for children who are under 21

The divorce team at Carlsons Solicitors will use their years of expertise to guide you through your proceedings from start to finish. Get in touch with the team today for trusted, supportive legal advice.