Separation and divorce or the dissolution of a civil partnership is a difficult time, without unexpected tax bills adding to the pressure. While tax is unlikely to be at the forefront of the separating couple’s minds, addressing the tax implications upfront can reap dividends later on. The considerations outlined below apply equally to married couples and to civil partners.
Capital gains tax generally
Married couples and civil partners are able to transfer assets between them at a value that gives rise to neither a gain nor a loss for capital gains tax (CGT) purposes. This can be very useful in mitigating tax.
Where a couple split up, there will often be a transfer of assets between the parties. If assets need to be transferred as a result of the split, it is best that this is done before the end of the tax year in which the separation takes place, as the ‘no gain, no loss’ rule continues to apply to end the of that year. If assets are transferred in a subsequent tax year but before the decree absolute, the parties are treated as connected persons and any transfers between them are deemed to take place at market value. After the decree absolute, the market value rule no longer applies and gains and losses are calculated by reference to the actual consideration changing hands. These rules will apply if one spouse or civil partner transfers his or her share of the matrimonial home to the other.
Thus transfer assets before the end of the tax year of separation to take advantage of the ‘no gain, no loss’ rule. Particular care must be taken where the separation occurs near the end of the tax year, as the transfer window will be short.
Transferring the asset at ‘no gain, no loss’ will give the recipient a lower base cost. Transferring at market value may trigger a CGT liability on the transferor.
Sale of the matrimonial home
Following a split, the matrimonial home may be sold or transferred into the sole name of one spouse or civil partner. If the home is sold (and assuming it is the couple’s main residence), generally there will be no CGT to pay by either spouse as long as the sale takes place within 18 months of the departing spouse leaving the family home.
If the departing spouse does not elect for another property to be his or her main residence, the matrimonial home can remain his or her main residence for tax purposes as long as the other spouse or civil partner stays in the property, thereby extending the availability of PPR beyond the 18-month point. However, if the departing spouse elects for another property to be his or her main residence, he or she may suffer a tax charge on a portion of their gain if the property is sold sole more than 18 after his or her departure.
Stamp duty land tax
There is no stamp duty land tax to pay where one spouse transfers his or her share in the matrimonial home to the other as a result of separation, divorce or the dissolution of a civil partnership.
Maintenance
Where one party pays maintenance to another or for the benefit of the children, no tax relief is available for the person paying the maintenance. It is paid out of his or her taxed income. Conversely, maintenance payments are not taxable in the hands of the recipient.
Inheritance tax
The inter-spouse inheritance tax exemption applies until divorce. It remains available between the date of separation and the decree absolute.
Pensions
Pensions can be a significant asset to be shared on divorce. Professional advice should be sought.
Practical Tip:
Advice should be sought on the tax implications prior to the split, to allow it to be managed in a tax-efficient manner.
