Beware: Tax traps on separation and divorce
If you and your spouse own assets, be that property or shares, and are contemplating divorce, it pays to take specialist tax advice at an early stage to ensure that the timing of your separation is as tax efficient as possible.
Disposals between spouses – Capital Gains Tax
Couples who are married or in a civil partnership who have been ‘living together’ at some time in a tax year, can transfer assets between them in that tax year at a value that incurs neither a gain nor a loss for capital gains tax purposes.
The optimum time to separate on a permanent basis is 6th April, or shortly thereafter. This gives a whole tax year in which to negotiate a financial settlement and transfer any assets between a couple without incurring a capital gains tax liability.
Any transfers of assets between spouses or civil partners that take place after 5th April following their permanent separation will be deemed to take place at market value and a capital gains tax liability may arise.
HMRC will consider a married couple as ‘living together’ unless:
- they are separated under a court order;
- they are separated by a formal deed of separation; or
- they are separated in such circumstances that the separation is likely to be permanent.
If you or your spouse have significant assets that may form part of a divorce settlement, careful forward planning could achieve significant tax savings.
The family home
Principal private residence relief generally applies to exempt any capital gain arising on the sale or transfer of the family home.
In order to benefit from this exemption, the property must be occupied by the individuals as their main residence. However, a person can only have one main residence at any one time. The family home will cease to be the departing spouse’s main residence when they leave the property.
With careful planning, potential capital gains tax liabilities can be minimised or eliminated, therefore taking advice at an early stage is key.
Stamp Duty Land Tax (SDLT)
No SDLT is payable if, following divorce or separation, you agree to split your property between you, or do so under the terms of a court order. However, the impact of the ‘second home’ SDLT surcharge introduced in 2016 needs to be considered.
The surcharge rules provide that a purchaser of a residential property who already has an interest in the whole or a part of another residential property will incur an additional 3% SDLT in addition to the standard rate of SDLT.
A common scenario that arises in a financial settlement is where one spouse moves out of the family home and buys their own property, leaving the remaining spouse in the family home. To make the overall settlement fair and reasonable, the departing spouse may retain an interest in the family home and when it is sold at a future date, they receive an agreed share of the sale proceeds. The purchase of the second home by the departing spouse whilst retaining an interest in the family home potentially falls foul of the 3% SDLT surcharge rules.
However, the rules have been amended to provide an exemption from the SDLT 3% surcharge for the departing spouse in certain circumstances.
The conditions for the exemption to apply provide that the agreement between the spouses must be recorded in a consent order approved by the court. If an agreement is reached between the spouses and it is not formerly approved by the court, the exemption will not apply and the 3% surcharge will be due on the purchase of another residential property by the departing spouse.
Our advice is to ensure that any agreement for the division of assets between you and your former spouse or civil partner is recorded in a consent order approved and ‘sealed’ by the court, not only will this provide certainty and clarity, it could save you an unwelcome SDLT bill.
If you would like any information about the potential tax issues that could arise from your separation or divorce, please contact Claire Tollefson on 01892 506191.