Tax and Divorce

Lisa Pepper

Divorce often brings a host of financial questions, and one of the most common concerns is how Stamp Duty Land Tax (SDLT) applies when property is transferred between spouses. The good news is that, in most divorce settlements, property transfers are exempt from Stamp Duty. However, there are important exceptions and other tax implications-such as Capital Gains Tax and Inheritance Tax-that separating couples need to consider.

Stamp Duty and divorce

Fortunately, transfers of property between spouses as part of a divorce settlement are usually exempt from Stamp Duty Land Tax (SDLT). The exemption applies to a transfer between the spouses or civil partners that is made under a court order on the divorce, or under an agreement connected to the end of the marriage or civil partnership. It is not available if the transaction involves someone other than the two of you, so if a transfer is not made under an order or agreement, or involves a third party, SDLT could be due and you should take advice before you transfer. For more information, please read our article about transfer of equity Stamp Duty.

Other tax implications for divorcing couples

In a marriage or civil partnership, either party can transfer assets to the other party with no tax consequence, provided they can prove that they lived together during the relevant tax year, and they have not separated.

Capital Gains Tax (CGT)

Once you separate, that changes, but you now have more time than you used to. Since 6 April 2023, separating spouses and civil partners can transfer assets between themselves at no gain or loss at any time up to the end of the third tax year after the one in which they stopped living together, or the date on which the court grants the divorce, if that is earlier. Transfers made under a formal divorce or separation agreement or court order have no time limit. A transfer outside these rules is generally treated as made at market value, which can produce a taxable Capital Gains Tax (CGT) gain for the person making the transfer. Our guide to capital gains tax on divorce explains the rules, including those for the family home.

Specialist advice from a family lawyer will be required as well as tax advice (see below).

Maintenance Payments

Spousal maintenance is not deductible from taxable income for the payer and is not taxable income for the recipient. Child support payments remain non-taxable.

Pensions

Pensions are often one of the most significant assets to be divided during a divorce. The tax treatment of pensions in a divorce is complex and depends on how the pensions are divided, whether by offsetting, earmarking, or sharing. Pension sharing, for instance, provides both parties with separate pension pots after a divorce.

Inheritance Tax (IHT)

Understanding how your estate might be treated for Inheritance Tax purposes in light of a divorce is crucial. If you have named your spouse in your will, divorce does not make the will invalid, but a gift to your former spouse, and their appointment as executor or trustee, take effect as if they had died on the date the marriage was dissolved, unless your will says otherwise. Also, assets passed to an ex-spouse are no longer exempt from IHT, which could mean a larger part of the estate could be subject to IHT when you die.

How can we help?

In our experience, tax is often not one of the main considerations when a marriage or relationship breaks down, but the tax impact of a divorce or separation should not be underestimated. Seeking specialist tax advice at an early stage in the process is highly recommended, and can ensure that there are no unexpected tax consequences and that any unavoidable tax liabilities are mitigated as far as possible.

If you would like to have a confidential discussion about divorce or separation with divorce lawyer, Lisa Pepper, call 0207 485 8811 or complete an online enquiry form.