Tax facts to consider upon divorce or separation

Tax and Divorce

Sometimes the breakdown of a relationship is unavoidable. And most of the time it’s painful. But as the dust begins to settle and proceedings get underway, both parties must think about the financial implications. Rarely, however, are the tax implications considered and often people pay far too much tax after a marriage breakup because they’re not sufficiently prepared to tackle it early on. Here are the key things to note about tax when it comes to separation and divorce.

Capital gains tax

When a couple are married and living together, they can transfer assets to each other without having to pay capital gains tax (CGT). If, however, they decide to separate, this tax-free benefit is lost. CGT must be paid once the tax year in which the permanent separation has taken place has ended. For example, if the couple separates on 31 January, they lose the ability to transfer assets tax-free on 6 April.

What tax exemptions are there?

Luckily, some shares and property can still be transferred without the need to pay tax, and some exemptions exist too. Let’s look at those:

• Business

Some businesses can be given away without a CGT charge. These include sole trader businesses, interests in trading partnerships, and certain shares in unquoted trading companies.

In order to benefit from the tax-free transfer, a formal election signed by both parties must be sent to HMRC and the specific criteria fulfilled. Also, the business must not be a property rental or investment venture. Those wanting to take advantage of this should speak to a tax accountant for the best chance of success.

• Property

If a property that has been the couple or family’s main home throughout the period of ownership is being transferred, it qualifies for a CGT-free transfer. This is because the sale of a house that has been occupied as a main home benefits from principal private residence (PPR) relief.

If the family home has not always been the main residence, principal private residence (PPR) relief may be accessible regardless. For example, if the house has been the couple’s main residence at any time, the last 36 months of ownership remains tax-free.

Alternatively, PPR can be claimed upon the transfer of the home on the couple’s divorce, provided the following requirements are met:

• One party stops living at the family home because the couple have separated
• The other party continues to live at the family home as their main home
• The party that moves out has not formally elected with HMRC for another property to be their main home
• The party that moved out later gives their interest in the family home to their former partner
• The transfer is made as part of the divorce settlement

• Inheritance tax

For inheritance tax purposes, transfers between spouses or partners are exempt from tax charges until the point of divorce or annulment. Those made upon divorce or for the maintenance of the family are also exempt from inheritance tax.

For full details of the financial and tax implications of a divorce or separation, speak to a professional financial advisor.