Tax implications on divorce or separation

When a couple is separating or divorced it is unlikely that they are thinking about the tax implications. However, as the dust begins to settle it is important that the tax consequences of the break-up are given proper consideration.

Whilst income tax does not automatically cause an issue for separating couples, as it is an individually assessed tax, there are other taxes that should be examined. For example, when a couple are together there is no capital gains tax (CGT) payable on assets gifted or sold to your spouse or civil partner. However, if a couple separate and didn’t live together for an entire tax year or get divorced, then CGT may be payable on assets transferred to your ex-partner.

The optimum time for a couple to separate would technically be at the start of the tax year, so that they would have up to a year to plan how to split their assets most tax efficiently. Obviously, in the real world couples will have far more on their minds than deciding to get separated on a certain day but these issues are worthy of consideration.

Planning note

Readers may not have realised that the CGT gift exemption is removed after a couple have a permanent separation, not just when they are divorced.

It is also important to make a financial agreement that is agreeable to both parties. If no agreement can be reached, then going to court to make a ‘financial order’ will usually be required. The couple and their advisers should also give proper thought to what will happen to the family home, any family businesses as well as the inheritance tax implications of separation and / or divorce.

Posted in HMRC notices

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