Official figures show that 2017 saw a decrease in divorces of opposite-sex couple in England and Wales, it was the lowest divorce rate since 1973. Taxation is probably the last thing on your mind when a long term relationship or marriage breaks down. However tax can bring its own problems to an already frustrating set of economic circumstances and is worth considering early in the separation process to make sure that both parties get the best.
The family home
Capital Gains Tax (CGT) is a tax which arises when you make a profit, or gain, on assets that are sold or given away. The rate of tax depends on the level of your other taxable income in the tax year and whether the asset sold or given away is residential property.
If you are married or in a civil partnership, transfers between spouses is on a 'no gain, no loss' basis for CGT, ie. CGT does not usually apply. The CGT exemption for transferring assets between partners ends on the 5th April of the tax year of separation. So for example, if you have a 'trial' separation on the 1 January which leads to a permanent separation, you have until the 5th April to complete any asset transfers before you need to consider CGT. This may not always be possible and CGT may therefore become a consideration.
The tax consequences of separation differ when it comes to the family home. Where the family home is your only or main residence throughout your period of ownership, no CGT is usually payable. The marital home is likely to be the main residence of both parties, however, this may change when one party moves out and acquires a new property. CGT relief will continue to be available for 18 months after vacating the property, if the property is later sold. The period of relief can be extended where the house is transferred to one party who continues to occupy the former marital home as part of the separation agreement. This additional period is only available if the transferring spouse has not made an election for any new property to be their main residence during this time. There is also an exemption from Stamp Duty Land Tax (SDLT) on transfers of property in connection with a divorce.
If there are young children involved you, or a court order may, agree to postpone any sale of the family home until the children reach 18. This is sometimes called a Mesher Order. These orders were more common 30 or more years ago and originated to permit a spouse to remain in the family home with the children until maturity, or a further order of the court.
If you enter into such an agreement, the family home is transferred to a trust as the date of the order or agreement. This is a disposal for CGT purposes, but if the property meets the conditions for Principal Private Residence Relief (PPR), the gain should be exempt at the time the settlement is created.
The deferred period ends when the children reach 18 and at that time the spouse living in the property usually becomes the outright owner. There is a deemed disposal at this time, however, providing the occupier used the property as their main residence for the whole time, the gain should be exempt from tax.
The family business
Where separating couples run a business together, this can bring its own difficulties. Spouses will often own shares, or assets of the business and arranging how these are transferred, and their values can be challenging. If an agreement can be reached before the 5th of April in the tax year of separation, then business assets can be transferred between separating spouses free of CGT. However, this is often an unrealistic timescale, so CGT will be a consideration. It may be possible to 'defer' any gain on business asset transfers, if certain conditions are met and both parties to the transaction agree. However, this may leave the partner receiving the business assets or shares with a larger CGT bill in the future should the business be sold and will need to be considered in the overall agreement.
Income tax and tax credits
Separating partners have a duty to support one another financially by paying maintenance until they are formally divorced. These payments may continue after divorce where it is ordered by the court as part of the financial settlement. The spouse making the payment will be taxed on their gross income and will need to pay the maintenance out of net (after tax) income. There is not usually any tax relief given for maintenance payments and the payments are not usually taxable in the hands of the recipient.
Tax credits for children can continue to be claimed by the partner with whom the children live. Tax credit payments cannot be split, so it is important to decide who will have the 'main caring responsibility' so they can continue to claim any tax credits due. It is important to inform HMRC of any change to your domestic arrangements quickly, in particular if a new partner moves in, as this can affect your tax credits claim. Late notification may result in a large overpayment, which will need to be repaid to HMRC.
Child benefit can also continue to be paid to the partner who has the main caring responsibility. However, if you have a new partner whose income is over £50,000, they may end up having to pay back part of the child benefit, under the new Higher Income Child. This can bring its own set of challenges to a new relationship and is worth considering at an early stage to avoid unnecessary tax bills.
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