Contemplating separation or divorce?
Beware the potential tax implications.
If your marriage is close to breakdown, there’s every chance that the last thing on your mind will be tax. But take care. There could be financial consequences you hadn’t anticipated. You need to think about Assets, Capital Gains Tax, the Date of Separation and your Matrimonial Home. (To keep things simple, we’ll use the term ‘spouse’ to mean married or unmarried partner).
As you’d expect, if you go through a permanent separation or divorce, you’d expect to divide your property or shares between you. You might do this for yourselves or ask a court to decide for you. Either way, you’ll need to carefully consider the tax implications.
It's all a question of timing
You may already know that HMRC treats transfers between spouses as being ‘no gain – no loss’. In other words, Capital Gains Tax doesn’t apply. But – did you know that this only applies before the end of the tax year in which permanent separation takes place. The date of the actual divorce is irrelevant.
Here’s an example –
Julie and Dan separate on January 1st 2017. The arrangement is amicable. On April 7th of the same year, Julie transfers a share portfolio to Dan. In exchange, he signs over his share of the house to her. The shares are showing a gain of £50,000. Unfortunately, the transfer date was after the year of permanent separation. They missed the deadline by two days.
The result? Julie will have to pay Capital Gains Tax on the gain.
The lesson? If you’re facing permanent separation, at the earliest opportunity, think about the tax implications.
But it is not always that simple...
… it rarely is. What if Julie and Dan separate but stay living in the same house? Here’s how the courts will look at it. The ‘separation date’ will either be –
the date set by court order or by the deed of separation. The date in which the couple separated in circumstances where it was likely to become permanent.
If it’s the court that decrees the asset transfer, then the disposal date will be the date of the order, unless it’s made before the decree absolute. In this case, the disposal date is the date of the decree absolute.
The matrimonial home
Of course, the major asset will usually be the property in which you’ve been living. Usually Private Residence Relief will be available. If the property transfer takes place within 18 months of the date the transferor moves out, any gain will be exempt. But – if there is more than one property or if there have been periods of absence, then matters become much more complex.
Our advice? As ever, consult your expert tax specialist. Give them everything they need in terms of periods of absence from the family home, legal separation dates etc. Do all this at the earliest opportunity. Only then will you have the best chance of avoiding potentially heavy tax obligations.
This legal information is not the same as legal advice and you may not rely on our post as a recommendation of any particular legal understanding. Please, consult an attorney if you’d like to get advice on your interpretation of this article.