For people who are getting divorced, it’s important not to underestimate the tax implications of divorce when drawing up a settlement. Income tax, capital gains tax (CGT) and inheritance tax (IHT) all need to be addressed, and it’s vital to get expert advice on these and other tax-related issues.
For a more detailed explanation of the tax implications of divorce read our article Taxation and Divorce.
CGT ground rules
While there’s no immediate IHT or income tax charge for assets transferred under a divorce settlement, there are CGT considerations following permanent separation.
There is no CGT on the transfer of assets between spouses/civil partners. Prior to 6 April 2023 this remained the case up to the end of the tax year of separation. From 6 April 2023 spouses and civil partners who are separating have up to three years (after the tax year in which they permanently separate) to transfer assets between them on a ‘no gain/no loss’ basis.
If the assets are the subject of a formal divorce agreement, there is no time limit for the transfer.
Thereafter, until legal divorce, gains are calculated as though the transfer took place at market value, and CGT may be payable on residential property at:
- 18% for basic rate taxpayers and
- 28% for higher rate taxpayers (this will be reduced to 24% from 6 April 2024).
Most other gains are generally taxed at 10% or 20%. Cars, assets valued below £6,000 and foreign currency are exempt from CGT.
Tax implications of property sales
Where a family home is sold under a divorce settlement, the gain is CGT-exempt if Private Residence Relief applies and contracts are exchanged within nine months of one partner leaving the property.
Where one partner remains in the matrimonial home, but it is still owned wholly or partly by the departing partner, under the rules from 6 April 2023, they will now have the option to claim Private Residence Relief when it is sold.
If the departing partner has transferred their interest to their ex-partner but is entitled to some of the sale proceeds when the home is eventually sold, they will be able to apply the same tax treatment to those proceeds as applied when they transferred their original interest.
Private Residence Relief will not be available to the departing partner if they have acquired a new main residence. They would need to elect (within two years) which property they wished to attract the relief.
Where foreign properties are transferred under the divorce settlement, foreign currency movements may impact CGT. Local taxation issues must also be considered.
Income tax
For income tax purposes, individuals are treated as ‘no longer married’ from the date of permanent separation. Spouses are taxed independently during separation and after a Final Order (previously known as Decree Absolute).
Any income from interest-earning assets (such as shares or bank accounts) allocated to an individual in a divorce settlement is subject to income tax.
Marriage Allowance must be cancelled if it has been claimed by either party.
Inheritance tax
Throughout a period of separation and until a Final Order is obtained, transfers between spouses or civil partners are exempt from IHT.
There’s a £325,000 lifetime limit for transfers made from a UK-domiciled spouse to a non-UK-domiciled spouse, but there’s no limit for a non-UK-domiciled spouse transferring to a UK-domiciled spouse – or where both parties are non-UK-domiciled.
After the Final Order, property transfers are IHT-exempt if there’s no ‘gratuitous benefit’ for the recipient. Other kinds of transfers are treated as potentially exempt, providing the donor survives for seven years afterwards. Maintenance payments are also IHT-exempt.
Given the financial complexities involved, we strongly recommend getting specific advice before making a divorce settlement.
Can we help?
Given the financial complexities involved regarding the tax implications of divorce, we strongly recommend getting specific advice before making a divorce settlement. Speak with your usual Shipleys contact or one of our specialists shown on this page.
Specific advice should be obtained before taking action, or refraining from taking action, on any of the subjects covered above. If you would like advice or further information, please speak to your usual Shipleys contact.
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