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Tax and divorce

It is well know that there is always a rush to solicitors divorce after the summer holidays as couples realise, after spending time together, they can’t stand each other.

So, in advance of this I thought I’d write about tax planning opportunities with a divorce. 

Very briefly…in the UK we have independent taxation. This means people are treated separately for tax purposes and are responsible for the own tax on their income and gains.

When a chargeable asset (e.g. property or shares) is transferred from one person to another the transfer is treated as being sold at market value. This can trigger a charge to GCT.

Married couples
When a husband and wife live together they are regarded as “connected”. Any transfers between them are treated as a no gain/loss. This means they can transfer assets without triggering a tax bill.

However, if the person receiving the asset later disposes of it, he or she will be treated as if they had paid the original amount.

Year of separation
Provided a husband and wife were living together at some time in a tax year, they can transfer assets between them at any time in that tax year at no gain/no loss.

There is no requirement that they should be living together at the time of transfer.

This means that if you separate this summer you can make transfers before 5th April 2015 without a tax bill being triggered. If you make any transfers after 6th April 2015 there could be a significant tax liability.

This is because you will not be treated as “connected” from 6th April 2015 and the market value will be used to calculate the gain and tax due.

After tax value
This is why it is a good idea to know the amount of gain on each property before you agree to a settlement. You need to know the net worth of each property, after tax.

For example, you could have two properties worth £200,000 each but property “A” could have a cost of £180,000 and property “B” could have a cost of £50,000. The amount liable to Capital Gains Tax if these where sold would be £20,000 and £150,000 respectively.

Assuming an annual allowance of £10,900 and a tax rate is 28%, property “A” would be worth £197,452 after tax, whereas property “B” would be worth £36,400 less at £161,052.

Private residence
Your private residence is exempt from CGT. However, there are rules which potentially make the property taxable if it is not occupied.

Commercial property
CGT on commercial properties can be complex because of tax reliefs such as Holdover, Rollover and Entrepreneur’s relief.

Recommendations
If you are separating then think carefully about the date of separating, just after 5th April is best because it takes you into the next tax year.

Delaying a divorce settlement may cost you a considerable amount of tax. To avoid tax on transfers of assets you may be able to make transfers before 5th April 2015.

I recommend you consider the following actions:

Action 1 – valuations and tax estimates

Get all properties valued and work out the gain in each property. This will allow you to assess the after tax value of each property. You can then share the estate and arrange for any property transfers before 5th April 2015.

Action 2 – interim transfers

Explore making interim transfers before 5th April 2015 as part of the settlement agreement.

Action 3 – complete an in-depth personal financial review.

As some time you may want to consider completing a detailed personal financial review as this may give you peace of mind over your situation.

The idea with the review is that you look at your lifestyle expenditure, income and capital and forecast (based on assumptions) your financial future.