The Tax implications of Divorce
An article published in The Telegraph at the end of last year claimed that the divorce rate is at its lowest level in 40 years. However, divorce is still something that we encounter on a regular basis and couples should be aware of the tax implications of deciding to go their separate ways. This can be a very traumatic time for those involved, and tax is probably the last thing on anyone’s mind at that point, but no one wants an unexpected tax liability after the assets have been divided. Make sure you take advice on the tax implications of divorce.
Capital gains tax
Married couples are able to transfer assets between them at no gain/no loss for CGT purposes. During the tax year of permanent separation, this can continue until 5 April. It is clearly beneficial to separate just after 6 April to allow a full year to arrange transfers between the parties but this is unlikely to be a key factor when deciding to part.
Transfers after the tax year of separation are deemed to take place at market value, even if no cash is paid between the parties, which could result in some CGT becoming payable.
There are certain exemptions relating to the transfer of the family home, and relief may be due for the transfer of some business assets, but advice should be taken on a case by case basis.
Inheritance Tax (IHT)
Transfers between spouses made prior to the final annulment of the marriage are exempt from IHT.
Wills should be updated following separation to reflect the change in circumstances and, where any trusts have been set up, it is also worth reviewing whether any changes are needed to trustees and beneficiaries.
Stamp Duty Land Tax
From 1 April 2016 the additional 3% stamp duty rate applies for the purchase of additional properties and this may have an unexpected impact on separating couples. If one party to the marriage leaves the family home and buys a new place to live, they will pay the extra charge unless they are separated under a court order or deed of separation.
As you can see, the timing of events can lead to potential tax liabilities and it is always sensible to seek tax advice before any transactions are undertaken. Please do get in touch if you would like to discuss your individual circumstances.
If you’d like to take advice on the tax implications of divorce, our expert tax team would be pleased to assist you.