Is tax payable when getting divorced?
Whether tax is payable will depend on the individual circumstances of your divorce or dissolution.
It is extremely important to understand that tax implications can arise at the point the relationship has broken down/separation occurs, rather than by reference to the date of the Decree Absolute or Final Dissolution Order.
The following taxes may be relevant, and we strongly advise that individuals seek independent legal or financial advice to understand if any of these apply, prior to a financial settlement being agreed or a consent order being made.
Income Tax
As spouses/civil partners are taxed separately on their income, the tax implications are generally limited to any income-producing assets that are transferred as part of the financial settlement.
It is not usual for maintenance payments to be taxed. However, in certain circumstances, Maintenance Payments Relief is available. Maintenance Payments Relief reduces your Income Tax if you make maintenance payments to an ex-spouse/civil partner.
Income Tax is likely to apply to pensions at some point, and should be a consideration prior to agreement of the financial settlement. How Income Tax applies will depend on the method used to divide pension assets (for example, whether an Attachment Order or Pension Sharing Order is used), the type of pension in question, and the tax status of both parties to the divorce/dissolution.
Inheritance Tax (IHT)
IHT is not typically an issue in divorce/dissolution cases.
Any transfers of assets between UK-domiciled couples continue to remain tax-free until the date of the Decree Absolute or the Final Dissolution Order.
If your financial settlement involves maintenance payments then these are likely to fall outside of the IHT rules, as they would be classed as regular payments out of income.
Stamp Duty Land Tax (SDLT)
When people separate there is often a property involved which has been the family home. If the property is to be transferred, then it will be exempt from SDLT (most commonly referred to as Stamp Duty) provided that the transfer has been ordered by a Court or made by agreement between the parties in connection with the divorce or dissolution.
If there is no such agreement or Court order, then Stamp Duty will be payable. The tax is based on the monetary value given for the transfer, which includes any cash payment, and any liability under a mortgage.
Stamp Duty will be payable on the purchase of any new residential property, for example if the non-occupying spouse/civil partner decides to buy a new property in which to live. In normal circumstances, the acquisition of a property while also retaining an interest in another one (for example, in the family home) would give rise to an additional Stamp Duty charge at the rate of 3 per cent of the value of the property. This charge would be payable in addition to the standard Stamp Duty rates.
However, where a spouse/civil partner owns an interest in a property in respect of which a property adjustment order has been made for the benefit of another person, they are not treated as owning that interest for the purposes of the additional 3 per cent charge, provided that the property is not his or her main residence, but it is the other person's main residence.
Capital Gains Tax (CGT)
CGT is probably the most relevant of all of the taxes for separating couples.
Timing is key here.
Assets of all types that are transferred between spouses/civil partners during a tax year in which they have lived together at some point, pass on a ‘no gain, no loss’ basis, so the recipient spouse/civil partner is treated as receiving the asset at the value at which the transferring spouse/civil partner acquired it.
However, if the transfer takes place in a tax year after the couple have formally separated, assets will be treated as passing at market value, and accordingly any gain in value since the assets were acquired will be taxable on the transferring spouse, subject to any available relief. In the case of a couple's main residence, Private Residence Relief may be available to exempt any gain arising after the year of separation.
Pensions and the lifetime allowance (LTA)
This is a particularly complex area of taxation and should always be considered having sought specialist financial advice. The main considerations are as follows:
Attachment orders - The total benefits, pension and tax-free cash, including payments to be made through the order to the ex-spouse/civil partner, are assessable against the pension holder’s LTA regardless of the fact that a portion of the benefits will be paid to the ex-spouse/civil partner.
Pension sharing - There can be effects on both the pension holder (referred to as the ‘member’) and the ex-spouse/civil partner. Pension sharing also has an impact on existing LTA protections. The table below outlines some of the key issues:
Conclusion
We have touched on some of the most common tax considerations for couples considering separation, divorce or dissolution of a civil partnership, however, this list is not exhaustive.
We believe it is of vital importance that specialist tax or financial advice is sought at the earliest opportunity in order to ensure that adverse tax consequences are avoided or mitigated as far as possible. We can help with this, so do contact us to speak with one of our specialist Charterted Financial Planners who can offer independent and unbiased advice.
This article offers information about financial planning on divorce/dissolution and should not be taken as personal advice. Tax rules can change and the benefits depend on individual circumstances.