Don’t let the Tax Man benefit from your divorce

In the early stages of a separation or divorce it is easy for a couple to become so absorbed in the more routine aspects of their lives that they may overlook any taxation implications of their separation.

Even when a split is amicable, there are a number of traps that can catch the unwary and that, if not properly advised, can result in handing over large sums to the tax man.

It is important to time the date of separation carefully.

Whilst married, a spouse can transfer assets to the other spouse without any Capital Gains Tax (CGT) arising.  This exemption disappears at midnight on 5th April after permanent separation not upon divorce.  The transfer has to be completed within the tax year.

If a couple separate say on 1st October 2015, they have until 5th April 2016 to transfer assets without CGT arising.  If they separate say at 9am on 5th April, the only have a few hours left to transfer without CGT arising.  This may prove to be an impossible task.

If it is too late to utilise the above exemption, if one spouse transfers his/her share of the marital home to the other spouse, it may be possible to avoid tax using PPR or “Principle Private Residence relief”.  Under this the last 18 months of ownership are always exempt from CGT provided the property has been the outgoing spouse’s main residence.

The outgoing spouse may be able to extend the 18 month period and extend PPR until the property is sold.  However, in this situation the outgoing spouse should remember that he/she cannot claim the new property as the principle private residence as well.

For spouses who have a family business, whilst they are married transfers of shares or assets in the business are exempt from CGT.  Again this disappears on the 5th April after separation.

If the transfer takes place after the tax year of separation there may be CGT to pay unless they qualify for “hold over relief”.  This does not wipe out CGT but postpones it until a future disposal.

Division of assets in a divorce can be complex and it is important to choose a Solicitor who specialises in this area of work.   Where spouses are concerned that a separation may trigger a tax bill, it is important to obtain both legal and accountancy advice sooner rather than later to ensure that they continue to benefit from the assets that they have generated rather than the Inland Revenue.

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