Tax is not always top of the list of our client’s concerns. However, couples with even quite modest assets can find themselves having to pay a substantial Capital Gains Tax bill when assets are sold or transferred as part of a divorce settlement.
In many cases, incurring some liability is unavoidable, however, with some careful planning, couples who are separating or getting divorced can avoid paying more than they need to. Timing can be crucial.
Spouses and Civil Partners can transfer assets between themselves without incurring a CGT liability. This changes when they separate permanently and only applies to the period between separation and the end of that tax year.
Not all couples can (or need to) take advantage of this rule but it is an essential consideration.
Capital Gains Tax is one of the less prominent taxes. The rules are very complicated, but in a nut shell if you sell or transfer certain assets you may have to pay tax on any increase in value since you acquired them (the gain).
The rate of tax charged will depend on the amount of income tax you pay.
Agreeing a financial settlement on divorce can take a long time. For many, it simply isn’t feasible to transfer any assets during the period between separation and the end of the tax year. However, in cases where there is co-operation between the parties, it may be possible to undertake some transfers even before a final agreement has been reached in order to lawfully mitigate a party’s tax bill.
You do not have to pay tax on the disposal of your main home if you are selling or transferring your family home. This is due to a relief called “Private Residence Relief”.
Other relief and elections may be relevant in a divorce context and it is therefore important to have an overview of the tax position from a specialist so that the tax implications and all options are known before final decisions are made.
The tax system is complex and there is rarely one obvious answer that ticks all boxes. The key thing is for our clients to understand the taxation implications and the various financial arrangements possible after a divorce, bearing in mind that litigating their liability is an important, but not the only consideration.
If you would like further advice on this subject and to avoid a potential liability please contact any of our matrimonial specialists at Boston, Sleaford, Spalding, Lincoln, Grantham and Newark.