We’re splitting up… what are the tax impacts?
On 13th October, I wrote about the impact of divorce on Wills ‘We’re splitting up… how do we move forward and plan for the future?’ and in this article I look at the tax impacts of couples separating, divorcing or dissolving a civil partnership, when they are already facing a plethora of hurdles, both emotional and practical. Even if there are no children involved, other people will be impacted, and the decisions made during this key period of stress could have lasting consequences and be difficult to unpick further down the line.
You and your partner may need independent help and guidance to put aside your differences for a short period to objectively discuss and agree how to separate your lives. For example, how will you split your personal and treasured possessions, and your bank, savings and investments accounts?
Not least will be the question of what to do with your family home. Not only will this be an emotional decision, but it could also have tax consequences for you both.
Do we have to pay tax when we’re splitting our belongings?
A financial settlement negotiated on divorce or dissolution of a civil partnership will inevitably involve agreements as to who gets what and require that these assets are valued. The terms of the settlement will include consideration of the tax consequences of the transfers.
Assets can be transferred between spouses and civil partners free of Capital Gains Tax (CGT), as they are treated as “no gain, no loss” transfers. Clearly, once a couple has separated, this treatment is no longer available. However, following recent changes, it is now possible for separating couples to benefit from this tax-free treatment even if it takes 3 years to transfer assets after the tax year in which they separate, or in which the divorce or dissolution is finalised, if this is earlier. The CGT relief also applies for an indefinite period to assets transferred under a Court Order or agreed financial settlement.
Whilst this may lessen the tax bill on separation, when the recipient finally comes to sell the asset, its base cost for the calculation of the eventual capital gain will be the original cost rather than the value agreed at the time of separation. If the asset increased in value substantially during the period it was jointly owned by the couple, the receiving partner may be faced with a hefty bill at the time of sale. For high-value assets, this potential liability should be taken into account in the financial settlement.
Will tax be due if my former partner buys my interest in our home?
Private Residence Relief is available to reduce any gain subject to Capital Gains Tax you make when selling your family home. In recognition of the position many couples may face on separation, ie at least one member of the couple may lose this benefit, new rules allow a little leeway for separations.
A common scenario is that the couple agree that one member will move out of the family home and the other will remain living there for a period, perhaps until children finish school, or until they can sell the property. If the separation proves to be temporary and the couple reconcile, any short period of absence will not impact the availability of the relief.
However, if the separation is permanent and the couple agree that the proceeds of sale are split between each other, without special allowances, Private Residence Relief would not be available to fully exempt the gain from tax for the partner who has moved out.
Specialist legal advice should be sought if the partner who moved out has since purchased a new home as it may be necessary to elect a property as a main residence for CGT purposes.
Stamp Duty Land Tax (SDLT) will also be a consideration. Transfers of property between spouses and civil partners can be made free of SDLT and will remain so after separation if made in accordance with a financial settlement or Court Order. However, if one partner buys a new home while they still own the former family home, this will be an additional home for SDLT purposes and the higher rates will apply.
We own our home as joint tenants. What will happen to my half if I die after we separate?
Owning a property as joint tenants means that you own the property together, and should one owner die, the property passes automatically to the other. If you are by contrast Tenants in Common, you each own a separate share of the property. If one partner dies, their share forms part of their estate and will be distributed in accordance with the provisions of their Will.
Couples who are married or are civil partners will generally hold their property as joint tenants – if you are unsure, a solicitor can help you to interpret your Land Registry documentation.
In times of relationship breakdown, it is worth reviewing the ownership position of your family home and making sure that, should one of you die, the interest in the house will pass in accordance with your wishes. A solicitor can help you to sever the joint tenancy, if this is recommended.
My former partner must make a payment to me as part of our financial settlement. Do I have to pay tax on this?
Payments made as part of an agreed divorce or dissolution settlement are not classed as income for the purposes of Income Tax. Equally no Income Tax will be due on maintenance payments agreed, either in respect of the former partner or any children. Conversely, if you are the partner paying maintenance, you will not be able to deduct this from any income in order to reduce your tax bill.
If the couple held assets which produced income for them both, once those assets have been transferred to one partner, that partner will be responsible for declaring the income in full to HMRC through their self-assessment return, and any tax due will be their responsibility alone.
Lots to think about… how can I get help?
The Solicitor acting for you in your divorce, dissolution or separation may be able to recommend a specialist tax solicitor or advisor. However, as this is a key time to be reconsidering your Wills, you may wish to consult a specialist Private Client Solicitor local to you in Marlow or Oxfordshire at an early stage.
Please contact me, Bethan Chant at bethan.chant@theburnsidepartnership.com should you wish to discuss any of the issues above in more detail.