The new tax year starts on April 6 2022. Coincidentally, the new divorce laws are also to come into force on that date! Ashfords Solicitors offers an overview for separated parents…
There are a number of tax consequences that couples should consider when thinking about separating. Couples should be aware of unexpected tax traps which they could fall into if they have been separated for a longer period of time before turning their minds to the financial aspects of separation. Many couples are not aware that it is the separation rather than the commencement of a divorce that can trigger tax consequences.
When a couple reaches the decision to permanently separate, there are a number of things to consider, both looking at the short term and long term arrangements for children and in respect of the finances. Seeking early and specialist advice enables separating couples to make sure that their financial separation is structured in the most tax efficient way possible and also prevents any unwanted surprises further down the line.
Alongside seeking early legal advice, it is common to need input from other specialist professionals from the outset, including financial advisers and accountants. It is important to put a team together early on to put couples in the best and most effective position moving forward. Having the right advice early on will make sure that couples not only formalise and protect their financial positions with a court approved financial order but will also make sure that they can navigate their separation and implementation of the financial agreement smoothly.
Capital Gains Tax (CGT)
Unmarried couples
For cohabiting couples who decide to separate, dealing with a jointly-owned property can bring with it important tax considerations. If someone is keeping the property and buying out the other party’s interest in their former home, there could be Stamp Duty Land Tax (SDLT) and/or Capital Gains Tax (CGT) consequences to consider before taking any action. Getting advice and calculations as to any tax liabilities early on prevent any settlement amount being swallowed up or eaten into by tax. There are also deadlines to report tax liabilities to HMRC that need to be complied with and any tax due to be paid on time to prevent penalties and interest being incurred.
Married couples
Transfers of assets between spouses do not usually give rise to CGT. This only applies when a divorcing couple transfers chargeable assets as part of their wider financial settlement during their tax year of separation. Timing is therefore key. If steps are taken to permanently separate at the beginning of a tax year, then a couple have will still be able to transfer chargeable assets CGT-free right up until the end of the tax year on the following 5 April.
If steps are taken to permanently separate towards the end of a tax year, then the couple run the risk of not having enough time to utilise the potential tax savings. Following the end of the tax year of separation, any transfers between spouses will be deemed to be at market value.
With specialist advice, a couple can identify if they have already taken steps which would commit them to a tax year of separation or take advice to see if they should hold off to benefit from a full year to deal with their financial separation. For example, a permanent separation in the spring could leave only a month to deal with any transfers free of CGT before the tax year end. This is particularly important where there are taxable assets in question, such as company shares or investment properties which can lead to large tax bills.
The family home
In many cases this will form a significant part of the couples assets/wealth. Generally, gains arising on the disposal of an individual’s main residence are exempt from CGT. This applies for a divorcing couple where the property has been their main residence throughout their period of ownership.
However, if one party moves out of the former family home, whilst the other remains living there, this can also bring with it potentially unexpected tax consequences in the longer term. The absent spouse could end up with a CGT liability when the property is eventually sold or if it is to be transferred and retained by one party. In this instance relief may still be available for a short period after they have moved out. Early advice and an estimated tax liability calculation is essential to give both parties an idea of what money they need to find to pay the tax and ultimately this can be factored into the wider settlement once it is known.
Inheritance Tax (IHT)
Unmarried couples
You will not automatically receive any of your partner’s estate unless they have provided for you in their will or you own a property as joint tenants and the rule of survivorship applies. Any inheritance you receive from your partner will be subject to IHT if the estate is large enough.
Married couples
Transfers between spouses are exempt from IHT and this continues throughout the period of separation up until the date of the Decree Absolute. There are no equivalent rules for IHT that limit the application of the spousal exemption to the tax year of separation. After divorce, any transfers between the individuals will be subject to IHT if the transferor dies within seven years of making the transfer.
Conclusion
There are important tax aspects to consider alongside a proposed financial settlement before steps are taken to document and implement the agreement. The tax implications arising on separation can be diverse and will likely depend on what assets are held and how they are going to be divided. Seeking early advice in the separation process is invaluable to ensure assets are transferred as tax efficiently as possible.
For more information please contact Louise Kiely, 07809 207551, email hidden; JavaScript is required