Divorce can be a difficult time for anybody and if you add in the tax complications that need to be dealt with at the same time then you have a very difficult mix indeed. Marriage offers a number of taxation benefits including the ability to transfer assets between spouses without any Capital Gains Tax consequences. Inheritance tax reliefs are doubled up where assets are transferred between married couples on death and for more elderly tax payers there is the Married Couples Allowance.
However, when the marriage breaks down leading to separation and/or divorce these tax benefits will be restricted or withdrawn completely. One point that is sometimes missed is that couples can only continue to transfer assets without any Capital Gains Tax consequences until the end of the tax year after separation.
In the majority of cases, the main asset to consider in a divorce will be the family home. Whilst you are residing within the family home, it will be considered your main residence and as a result, you will be entitled to claim Principal Private Residence Relief generally reducing any gain on its disposal to nil.
However, the moment one spouse leaves the property it ceases to be their main residence for tax purposes. This does not lead to an immediate tax charge but it will often be necessary to transfer the share of the property to the other party or dispose of the property altogether and this can be a problem.
A property will continue to be treated as your main residence for up to three years after you leave. However, it is not uncommon for there to be a longer gap between one party leaving the property and its transfer to the other. Therefore, HMRC now allows you to claim Principal Property Relief if certain conditions are satisfied; the transfer of the property must be made by agreement or Court Order and the spouse who has left the property has not elected for another property to be their main residence.
Therefore, the calculation of whether there is a liability to Capital Gains Tax is dependant on how and when the transfer took place so professional advice should be sought.
Many spouses will be in business together and this adds a further level of complication to the mix. Both parties will have an interest in the business and may derive their main income from it and this makes the separation of the business even more difficult. It maybe that one of the parties may leave the business but this needs careful thought also to avoid unwanted tax consequences.
Furthermore, should either spouse reduce the amount of their work in the business, or cease working altogether, they may not be entitled to claim full Entrepreneurs’ Relief which can reduce your Capital Gains Tax rate from 28% to 10%.
Finally, divorce will automatically revoke any existing will, which is usually what both parties want but it is vital to make new wills to ensure that you do not die intestate as this may see your assets not passing as you had intended.
It’s always going to be a difficult time when a marriage breaks down and the tax complications just add another dimension so obtaining professional advice from the start is imperative.
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