Important tax issues in divorce or dissolution

The Christmas period is often a time when people feel a lot of pressure to have fun and spend quality family time. While many families are fortunate to have an enjoyable break together this is not, sadly, the case for all. The festive period can be a time which leaves some couples contemplating divorce or separation in the New Year. 

The tax aspects for a divorce or dissolution of a civil partnership are essentially the same. This article doesn’t cover the differing issues faced by couples not in a marriage or civil partnership who have decided to separate. 

Think about Capital Gains Tax (CGT): If you have property or assets such as shares or a business this is likely to be the main tax at stake. This will be an issue whether you are transferring property between you or selling assets to realise cash. 

Watch the window: If you are transferring assets between you the timing of the initial separation can impact on the tax position. While a couple are still living together they can transfer assets between them without CGT. This relief is available right up to the end of the tax year in which they separate. This gives couples a window of opportunity to sort out their affairs and exchange assets without CGT consequences. But if the split occurs late in the tax year then this can be a very short period of time. Please be aware that your advisor will have to ask personal questions about when you separated to see when the window closes.

Still connected: After that first tax year, a couple remain ‘connected’ to each for CGT purposes other until divorce. This means any transfers are deemed to occur at market value until the final divorce or dissolution and could trigger CGT.

There are reliefs to help: For your home, Private Residence Relief (PRR) is the key relief. If the home has been the couple’s own or main residence throughout their ownership then this could exempt any gain from CGT. 

Moving out: It is likely one of the couple will move out prior to sale. While there are concessions to allow the departing spouse to still benefit from PRR even after leaving the property it can affect the PRR they might want to claim on a new property in the future. Take advice to clarify the position.

Time to sell: If your home takes a while to sell, you can always claim PRR for the last three years of ownership even if you have left the property.  However, from April 2014 this final period of exemption will reduce to 18 months after moving out.

There’s always the Annual Exemption: Don’t forget each party can use their annual exemption – the amount of gain you can make tax free each tax year – against any gains. For 2013/14 this is £10,900. 

More relief for businesses: For a transfer of business assets it may be possible to claim hold-over relief, gift relief or, on a sale, Entrepreneurs’ Relief to mitigate any tax. Advice should be sought in these areas.

Don’t forget to update your tax credits claims: You must report a change in circumstances such as one party moving out to HMRC within 30 days.  This includes separations under a court order or separations which are likely to become permanent. 

Update your Will: Finally, post divorce or dissolution, review your Will. Gifts to former spouses and executorships will be invalid after divorce so you might want to include new gifts and executors. It’s worth checking the Inheritance Tax position too now the parties will have only one nil rate band each.

Helen Thornley, Tax Consultant

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