Tax may not be front of mind when a married couple or civil partners decide to part; however, it is something that is very important to bear in mind. The tax on divorce and how matrimonial assets are divided – and how much each party will get to walk away with – is not insignificant. It is essential to seek advice around tax implications for divorce settlements as early as possible, due to the complexities of the system and possibility of changes in legislation or HMRC interpretation.
There are several kinds of tax considerations in divorce that need to be planned for. Here are some of the more common areas of tax in divorce to bear in mind.
Capital gains tax implications for divorce settlements
As a rule, when assets transfer from one spouse to another, they are not subject to capital gains tax. They are, instead, considered to be transferred at a value that does not result in a gain or loss for either party. Before April 2023, this rule only applied to partners still living together at one point or another during the tax year. After April 2023, the rules changed to extend the time scale to three years following the tax year of separation, or date of decree absolute if this was sooner.
After the three years are up, transfers that have not been made will be assessed at market value, which could make them subject to capital gains tax if they fall into the appropriate financial brackets. Therefore, delaying transfers in this manner could cause assets from the partnership to be subject to tax implications for divorce settlements that could have been avoided if actioned sooner.
Family home divorce and taxes
For a large number of divorces, the family home will represent the largest financial asset form the union. An immediate sale to release the capital could be tempting to allay immediate monetary concerns. However, this may not always be the best action to take when it comes to thinking about the tax consequences of divorce. Generally speaking, the sale of the main family home will not fall under capital gains tax implications for divorce settlements.
Under the latest legislation, if one spouse or partner moves out of the main family home, to buy or rent another property, the other one can still claim capital gains tax exemption when the family home is sold to a third party and they, too move on to somewhere else. When the property is a second home, or commercial premises, the rules are different and you will need to seek specialist advice.
Income tax implications of divorce
Married couples are taxed independently from each other, so normally, divorce would not have much impact on individual income tax responsibilities. This is especially true if neither party’s working or earning arrangements change following the split. When one party pays the other maintenance, either for the upkeep of children, or for the former spouse themselves, this, too, is not usually subject to UK income tax implications for divorce settlements. Maintenance payments, however, are also not tax relievable for the person paying them.
Once again, however, seeking specialist advice on income tax impact on divorce is a sensible precaution. It offers peace of mind if there is nothing to pay, and prevents a serious problem later on if tax is required, but has not been paid. If tax is needing to be paid, settling the bill quickly will get it ticked off the list at what is a busy, emotional time, and prevent you from forgetting to pay and facing hefty fines further down the line.