Tax and Divorce

Tax implications for divorcing couples

As the end of the Stamp Duty holiday looms on 31 March, that is not the only deadline that separating and divorcing couples should have on their radar. 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)

Post-divorce or separation however, that is not the case, and instead, such transfers to an ex-spouse or ex-partner result in a Capital Gains Tax (CGT) liability on any estimated gain made by the ex-spouse from whom the asset is moved.

If you are in the process of divorce or separation, the rules stipulate that you have until the end of the tax year of separation (i.e. on or before 5 April), to transfer assets without a CGT consequence. This applies regardless of whether you continue to live together, having officially separated. Therefore if you separated on or after 6 April, it is important you consider whether you need to transfer assets to your spouse or civil partner before 5 April the following year.  Specialist advice from a family lawyer will be required as well as tax advice (see below).

Stamp Duty Land Tax (SDLT)

Fortunately, transfers of property between spouses as part of a divorce settlement are usually exempt from SDLT. However, if one spouse buys out the other, SDLT could be due depending on the amount.

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 can affect the validity of that will. 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.