Tax rules on divorce As the Brexit debates rage on, separation and divorce are topics which often feature in the headlines. But what about when divorce involves people, rather than nations?
Divorce can be one of the most difficult and stressful processes which an individual has to face, so worrying about whether you are paying unnecessary tax is an additional problem which most people could do without. However, with the right professional advice, tax planning needn’t be so stressful. Here we try and explain some of the financial legislation which may affect a settlement. Capital gains tax (CGT)
Following the tax year of permanent separation, but before the Decree Absolute, spouses and civil partners are still classed as connected persons for CGT purposes. This means any transfer of assets will be deemed to have taken place at market value, regardless of whether any actual proceeds were received. Therefore CGT will be due on the market value less the cost of the asset. If the asset has appreciated significantly since acquisition, there could be a large amount of CGT due. Conversely, any assets transferred which are sitting at a capital loss will result in a “clogged loss”. Generally capital losses are set off against capital gains of the same year or carried forward to set off against subsequent gains. Where a loss arises on a disposal to a connected person, the loss can only be set off against gains from the same connected person. If a loss arising as part of the divorce settlement cannot be offset by other gains, the potential to use this loss in the future is severely restricted.
Where a transfer of assets does result in a gain, it will be liable to CGT at 10% for any gain falling within the basic rate band (18% for residential properties) and 20% for gains falling within the higher rate band (28% for residential properties). Certain assets may qualify for the Entrepreneurs’ Relief rate of CGT of 10%, however qualifying conditions have to be met.
When a couple is married and living together, any transfer of assets between them will take place at “no gain / no loss” (NG/NL) meaning that no CGT will be payable. However this tax benefit of marriage ceases at the end of the tax year following permanent separation and not on the legal divorce (Decree Absolute). The tax year runs from 6 April to the following 5 April therefore the closer a couple separates to 5 April, the less time they will have to transfer any assets if they wish to make use of the NG/ NL rule. “However this tax benefit of marriage ceases at the end of the tax year following permanent separation and not on the legal divorce”
If you would like to discuss any aspect of tax planning following separation or divorce contact our tax team on 0330 058 6559 .
4 | S C R U T T O N B L A N D | P e r s o n a l A d v i s e r
Made with FlippingBook - Online Brochure Maker