We often get asked about the tax situation on divorce. Whilst there is no one size fits all, the following is a general outline of the common tax issues that arise on a divorce or separation. Advice should always be sought at an early stage and a plan put in place. Roythornes’ Private Client and Tax team are on hand to assist.
Capital Gains Tax (CGT) – The Family Home
While married or in a civil partnership, any transfer of assets between the couple is deemed to be on a “no gain no loss basis” for CGT (see below).
If a marriage or civil partnership breaks down and one of the couples leaves the family home, that person can continue to be treated as occupying the family home for the purposes of Principal Private Residence Relief (PPRR), provided that all the following apply:
- One partner (the departing partner), who owns or has an interest in the family home, leaves.
- The other partner continues to reside in the family home.
- The departing partner has not elected that some other dwelling should be treated as their main residence.
- One partner disposes of their interest in the family home to the other.
- The departing partner makes a specific claim for PPRR to apply to their interest in the family home.
This treatment is necessary because once a divorce or dissolution becomes final, CGT can apply to a transfer of assets between the former couple.
Mesher Orders can help, but they require careful planning and advice.
CGT – Generally
Individuals who are married and are living together can transfer chargeable assets between themselves without any CGT arising. For example, if a wife is holding an asset that has an unrealised capital gain, she can transfer the asset (or part of it) to her husband without the disposal giving rise to CGT. Essentially, the recipient is deemed to have purchased the asset for the same price that their spouse originally paid for it.
The phrase “living together” is defined in statue, which treats married couples as living together unless:
- they are separated under an order of a Court; or
- they are separated by a formal Deed of Separation; or
- they are in fact separated in such circumstances that the separation is likely to be permanent.
All three alternatives require that the spouses or civil partners be separated, that is, that the marriage or civil partnership should have broken down. If it has not broken down but the couple does not live in the same house they are still treated as living together for CGT purposes.
When a married couple does separate, they are still considered connected parties for CGT until the date of the decree absolute, which means transfers happen at market value.
A transfer that occurs in the tax year of separation is still treated as being made on a no gain no loss basis. A transfer of an asset which takes place after the end of the year in which separation occurs will take place at market value.
Stamp Duty Land Tax (SDLT)
There is no general exemption from SDLT on a transfer between spouses. However, transactions in connection with divorce are exempt if it is:
- in pursuance of an order of a court made on granting in respect of the parties a decree of divorce, nullity of marriage or judicial separation;
- in pursuance of an order of a court made in connection with the dissolution or annulment of the marriage, or the parties' judicial separation, at any time after the granting of such a decree;
- in pursuance of an order of a court made at any time under section 22A, 23A or 24A of the Matrimonial Causes Act 1973;
- at any time in pursuance of an agreement of the parties made in contemplation or otherwise in connection with the dissolution or annulment of the marriage, their judicial separation or the making of a separation order in respect of them.
The last of these is quite broad in scope and leaves room for interpretation.
Inheritance Tax (IHT)
Transfers between spouses are exempt from IHT (though there are restrictions if the recipient is not the UK domiciled and has not elected to be UK domiciled for UK IHT). This exemption continues to apply until the date of the decree absolute.
Transfers after that date are Potentially Exempt Transfers, unless specific exemptions apply, and need to be survived by seven years to be free from the estate for the purposes of IHT.