Guide to Tax Implications When Separating
Separation and divorce can be painful in more than one way
This is because there is no general tax exemption when couples split, which means that without careful planning unexpected tax liabilities can arise.
The tax provisions apply equally to divorces and the cessation of civil partnerships.
When arriving at a financial settlement on the terms of distributing the marital assets, there is a tendency to ignore the tax implications in establishing who gets what, other than a general proviso that all reasonable steps should be taken to reduce the associated tax liabilities. Capital gains tax is the biggest threat; however income tax implications should not be overlooked.
Capital gains tax
Before considering the capital gains tax treatment of any transfers, it is worth considering when an asset is deemed to have been disposed of for tax purposes.
There are three potential scenarios where an asset is transferred pursuant to a court order:
- before the date of the decree absolute, the date of disposal is taken as the date of the court order.
- made before the date of the decree absolute, but the asset is not transferred until after the date of the decree absolute, the date of disposal is taken to be the date of the decree absolute.
- made after the date of the decree absolute, the date of disposal is the date of the court order.
The capital gains tax exemption for transfers between spouses who are living together, applies up until the end of the tax year in which a couple separate. Consequently, the date on which a couple separate becomes of vital importance and is generally held to be:
- the applicable date of a separation by court order or deed of separation; or
- the date on which the couple separated in such circumstances in which it was likely to become permanent.
Once the date of separation has been established and the end of the tax year in which separation occurred has passed, couples do not have any general capital gains tax exemption for transfers of assets on or in contemplation of divorce. Consequently, it may become necessary to consider what use can be made of existing reliefs.
Disposal of the marital home
Main residence relief can be extended indefinitely in respect of the absence of a disposing spouse, as long as the disposal is to the ex-spouse and three conditions are satisfied:
- the transfer is made under an agreement between the spouses/civil partners or under a court order;
- throughout the period from the individual moving out to the transfer, the house continues to be the only or main residence of the other spouse/civil partner; and
- the individual has not elected for another house to be their main residence for any part of that period.
This unfortunately will not help the absent spouse in circumstances where they have been absent for more than 18 months and the marital home is to be sold to fund the settlement. Where the absent spouse has purchased a new residence, it will be necessary to consider the impact of the loss of main residence relief on the new property.
For help and advice regarding separation and divorce contact our family team on 01787 277375 or use the online form.
To discuss your tax options, please contact the author of this guide Martin Glick via his website.