Divorce - a Taxing Time

Divorce can be a difficult time for anybody and the changes that have been introduced in relation to mediation and the legal aid system have, according to reports, only made matters more difficult for some.  On top of the legal issues are some very important tax considerations that can sometimes be overlooked as everyone deals with the very difficult issues that need to be faced.

However, when the marriage breaks down leading to separation and/or divorce certain tax benefits will be restricted or withdrawn completely.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.  This can mean that if a couple separate late in a tax year the time they have to pass assets to each other in a tax efficient way is severely restricted.

In the majority of cases, the main asset to consider 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 either its transfer to the other spouse or sale, especially in the current market. Therefore, HMRC allows you to claim Principal Property Relief if the transfer of the property is 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.  However, this does potentially disadvantage the party that left the family home as any property they are living in will not qualify for tax relief during the same period.

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 may be that one of the parties may leave the business but this needs careful thought also to avoid unwanted tax consequences.

If either spouse reduces the amount of their work in the business, or ceases working altogether, they may not be entitled to claim full Entrepreneurs’ Relief which means an increase in the tax rate from 10% to 28%.

Finally, divorce removes your ex-spouse from your Will, although the balance of your Will continues to be valid, so its vital to revisit your Will with proper legal advice to ensure that your assets pass as you intend. 

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.

Graham Poles
Tax Partner

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