The Tax Implications of Divorce

During my last blog I looked at the tax benefits of marriage, so forever being the optimist, this time I have decided to look at the reverse and consider what happens on a divorce.

We are often asked to provide tax advice on a separation/divorce so that the potential liability for either party can be factored into any settlement agreement.  The settlement agreement will inevitably involve dividing up the assets and transferring ownership from one party to the other. As a result, the primary tax to consider is capital gains tax.

All the time a married couple are living together, they are able to transfer assets to each other freely without creating a capital gains tax liability. However as soon as they separate in circumstances which are likely to be permanent, this tax benefit ceases from the end of the tax year in which they separate.

Any transfers of assets in subsequent tax years will give rise to a capital gain based on the market value of the asset being transferred. For example if a couple decide to separate in March and then proceed with a divorce after the 5th of April, it will already be too late to transfer assets without a capital gains tax liability. Therefore if you are going to separate, make sure it is on the 6th of April to maximise the time available to sort out the financial arrangements.

Once the beneficial ownership has been transferred, the recipient will also be taxed on any income produced by the asset from that point onwards. This could create a higher overall income tax charge if one spouse is taxed at a higher rate.

Finally, the good news is that for Inheritance Tax purposes, transfers between UK domiciled spouses or civil partners are still exempt from Inheritance Tax, despite being separated, right up to the point the divorce is finalised.

The tax implications of separation and/or divorce are highly complex so please contact your local Perrys branch if you require advice.

Article written by Craig Harman