Beware of some nasty surprises that can arise if you do not take professional advice about the tax consequences of your divorce / financial split.
For the majority of couples going through a separation, the tax consequences of their financial split may not even be on the radar. However, there can be some nasty surprises if early advice is not taken. There are also likely to be changes to the tax regime brought in by the Finance Bill, which could change the landscape.
I am listing here some tips to help avoid the bear traps! :
Date of Separation
The date of separation is significant for both income tax and Capital Gains Tax “CGT”. Transfers of assets between spouses/civil partners may be exempt from CGT within the tax year of separation so it may be wise to expedite settlement and the transfer of assets within the tax year of your separation.
Income Tax and Aliment
No income tax is payable on child or spousal aliment in the hands of the recipient nor, unfortunately, is any tax relief allowed in the hands of the payer.
The three year Principal Private Residence “PPR” rule may reduce to 18 months!
At the moment a person choosing to leave the family home, as is common in a separation, has the comfort of a three year relief if the property is transferred to their spouse/civil partner within that period. It is proposed that this period be reduced to 18 months. If the current proposals in the Finance Bill are implemented, the change will have retrospective effect. In practice this means the reduced period of 18 months will apply to any contract to sell or transfer property that is concluded on or after 6th April 2014. This change significantly reduces the time available to agree terms of settlement and is likely to present a challenge for many. Consequently, this may well give rise to CGT for separating couples, particularly those who are on good terms who think there is no particular rush to deal with their finances. Watch this space for further updates as the Finance Bill progresses through Parliament…
Planning to hold on to the family home in joint names meantime?
Some families decide to retain the family home in joint names even after a separation for the benefit of the kids. Consequently it is quite common for families to enter into a deferral arrangement i.e. where a sum is to be paid out from the house, or the house is to be sold some years later for example upon a child reaching 18. Despite the time lag, tax can potentially be mitigated in this situation if settlement is agreed within the tax year of separation and the settlement is carefully drafted.
Are you transferring assets outwith the tax year of separation?
Holdover relief may be available on the transfer of shares or other assets. Careful advice is needed in relation to the context of settlement as to whether consideration has been given for the transfer of the asset in question. Consideration in this instance is not limited to money or money’s worth.
Do you have a non UK domicile?
More and more cases in the UK involve parties who may be UK resident but not UK domiciled for tax purposes. If the current legislation and tax consequences are overlooked there can be unexpected and serious consequences where there are overseas assets involved, principally where the parties had elected before separation to be taxed on a remittance basis. Again the timings of settlement and implementation of settlement are key and tax is capable of being mitigated with the right advice. Anyone domiciled outwith the EU is exempt from VAT and this can make a significant difference to the costs of litigating in the UK.
Watch out – Stamp Duty Land Tax “SDLT” may be payable upon the transfer of property between cohabitants which is different to the exemption enjoyed by spouses and civil partners!
Beware of the traps. You will see that it is advisable to take early advice upon separation!
See also our Finances & Asset Protection page.