Tax consequences of errors in MoJ divorce form

22 December 2015

George Bull

Publicity surrounding errors in the online form used by the Ministry of Justice to calculate the financial assets of divorcing couples has caused considerable embarrassment. With the MoJ urgently investigating what went wrong, and with the continuing undercurrent of concern that some officials may have known about this issue for much of the period since the form was introduced in April 2014, there is widespread relief as it becomes clear that very few couples represented by law firms in their divorce will have suffered as a result of their errors.

However, there is concern for ‘DIY’ divorcing couples who might have thought that they had reached finality regarding the allocation of assets only to discover they may have to revisit their figures.

So what are the tax and related implications? Those affected have had their assets overstated, as debts and other liabilities have not been taken into account. This might affect capital gains tax and/or inheritance tax liabilities going back to 6 April 2014.

Capital gains tax

Transfers are not covered by the inter-spouse exemption after 5 April following the date of separation so, in these situations, CGT might be a consideration. The deadline for the submission of 2014/15 returns, and the payment of the related tax, is 31 January 2016. Many of those affected won’t yet have finalised their returns and paid the tax. They may now have to do a provisional basis. If they have already paid their tax they will have to consider whether they can amend their return and claim a repayment. The need to revisit the divorce settlement via the court might put some people off.

Inheritance tax

Up to the point of the decree nisi, transfers between the spouses are covered by the inter-spouse exemption. After this point, transfers for the maintenance of the former spouse and children are still exempt for IHT purposes. So any transfers made after the decree nisi are likely to be ‘potentially exempt transfers’ which will fall outside the IHT net after seven years, provided they are not for maintenance. Unless one of the parties has subsequently died, it is unlikely that any IHT return will have been submitted in connection with the divorce settlement. Amendments to records of values transferred can therefore be made when the revisited values are known.

Finally, those who are affected may have to incur costs to return to court to renegotiate. Who will pay these costs? There’s no sign yet of the Ministry of Justice offering its own financial remedy for this problem.

If you would like to discuss any of the issues further, please contact George Bull or your usual RSM contact.