With the emotional turmoil that comes with divorce, individuals could easily be forgiven for overlooking the tax implications. The legal fees are well known and lamented. However, many people are unaware of potential tax charges.
So, if the worst happens, what do you need to know?
Married couples and civil partners can transfer assets between themselves without capital gains tax, but this exemption only lasts until the end of the tax year of separation. So that means that a couple separating in August 2017 following the holidays only have until 5 April 2018 to transfer assets without potentially triggering tax charges. That’s a short timeframe to sort out who gets what.
The family home is a complex area. Most individuals are aware that, thanks to main residence relief, there is generally no capital gains tax payable on the sale of a family home. However, when one of the individuals moves out of the property on separation, it will no longer be their main residence for capital gains tax purposes. Whilst there is some leeway provided in the legislation (the final 18 months of ownership will still qualify for tax relief), it can often be years before ownership of the family home is resolved and the property is either transferred or sold. If so, the final sale or transfer will then trigger an unwelcome capital gains tax bill for the individual who moved out.
A Mesher order (under which the sale is postponed while the spouse and children remain in the family home) can preserve the tax relief. However this results in a trust being created which brings further complications in the way of inheritance tax.
Speaking of which, inheritance tax is slightly more generous than other taxes in that any transfers made before the decree absolute will still be covered by the spouse exemption. The situation is less generous for a non-UK domiciled spouse where the exemption is limited to £325,000.
Then there is the issue of pensions, which can be split between the couple in various ways. Those who thought they had already done their pension planning should take note – pension-splitting on divorce can impact upon the pension lifetime allowance. And finally, don’t forget that divorce does not revoke a Will, instead the Will is read as though the former spouse died when the couple divorced. Clearly this will need reconsidering as soon as a couple decide to split.
When looking at assets and income that may have once seemed sufficient for a family, they can be overstretched when divided into two, and wasting hard-earned funds on tax charges is the last thing couples will want to do.