What are the tax implications of getting divorced?
Posted on 11th August 2022
The end of a marriage or civil partnership is almost always a stressful time for all those involved. In 2020, there were just over 103,000 divorces granted in England and Wales. This was a 4.5% decrease from 2019 - but the surprising (and rather sobering) statistic is that around 42% of UK marriages and civil partnerships end in divorce.
In the majority of cases, divorce isn’t just a case of breaking up and moving on. With emotional stress, living arrangements, childcare issues and possible negative effects on the couple’s families and friends aside, divorce also brings up the issue of money - specifically the dividing of any savings, shares, personal possessions and property.
How could divorce affect the tax you pay?
First of all, you and your soon-to-be ex-husband, wife or civil partner will need to agree - either with or without a lawyer or mediator, depending on your relationship - how you’re going to separate your finances which could include pensions, savings, property and investments. This then needs to be put into a legally binding agreement, via an application for a consent order.
Once you’ve agreed on how your assets will be split and the court has agreed as well, you will need to consider the tax implications of your divorce.
When you ‘dispose of’ (i.e. give) assets to your ex-husband, wife or civil partner, you will not usually need to pay Capital Gains Tax, regardless of what those assets are or how much they’re worth, provided that the transfer is made before the end of the tax year in which you separated and that you have lived together at some point during that tax year.
It’s important to note that couples are treated as living together with their husband, wife or civil partner even if they are not physically living at the same property, as is defined in the Income and Corporations Taxes Act 1988 section 282.
So, for example, if you separate after 6 April 2022, you will have until 5 April 2023 in which to carry out any asset transfers. After this date any assets being transferred will be seen as gifts, and therefore liable to capital gains tax. In this case, the asset is treated as if the person receiving it has been paid an amount equal to the total of its original cost.
Both parties involved in the divorce have an annual capital gains tax exemption amount, which will apply to any assets that are disposed of during a divorce or legal separation. Therefore, you can make a certain amount of gains before you are required to pay tax.
Please note that if you are not married or in a civil partnership, but are cohabiting i.e. just living together as a couple, you will not be able to make capital gains tax free asset transfers in the same way.
How is the selling or transfer of the matrimonial home taxed after a divorce?
Since the matrimonial home is normally the most significant asset under consideration during a divorce, it’s important to be aware of the tax implications of transferring ownership from one party to the other, or selling the property entirely.
The government and UK law recognises a principal private residence as a property - a house, flat or apartment - that you own (whether jointly or singularly) and inhabit as your main place of residence. Principal private residence relief (PPRR) is a type of capital gains tax that is automatically applied when you sell a property.
The government made a few changes to PPRR which came into effect in April 2020 in order to ensure that the main beneficiaries of the relief are genuine owner-occupiers, so it’s important to know how this applies to you.
If one of you remains living in the principal private residence until the house is sold, your share of the proceeds will remain CGT free. However, your ex-spouse or civil partner’s share may incur CGT, unless the property is sold within nine months of them moving out. In this instance, the proportion of their gain will be CGT free.
However, if the property is sold after nine months of them moving out, their gain will be subject to CGT, unless they are able to use their annual exemption amount against it.
If the ex-spouse or civil partner leaving the jointly owned home decides to legally transfer their share of the property to the person remaining in the house, they may be entitled to principal private residence relief from CGT available from the point that they move out, until the point of transfer.
To qualify for this CGT relief, this must be done more than nine months after leaving the home. The transfer must have been made as part of a financial settlement, and the property in question must continue to be the main residence of the ex-spouse or civil partner who remained living in the property.
More information is available via the Capital Gains Tax self-assessment help sheet.
How we can help you with the tax implications of your divorce
If the gains made from a divorce or separation is within the basic income tax band, then you will pay 10% tax on your gains and 18% on your share of the profit from your residential property sale.
If you pay higher or additional rate tax, or if the amount gained through the divorce or separation takes you into a higher tax bracket when added to your taxable income, you will pay 20% tax on your gain and 28% tax on your share of the profit from your residential property sale.
Therefore, the amount of CGT you could end up paying on your gains or from the sale of your shared home could be substantial, so it is important that you work with your accountant to legally reduce your CGT charges as much as realistically possible.
If you’re in the market for a new accountancy firm who can offer advice on reducing your CGT, contact us and we’d be more than happy to see how we can assist you.
Nicola J Sorrell - Effective Accounting
Founder | Xero Champion | IR35 Expert
Tagged as: For - Contractors, For - Limited Companies, For - Property Owners & Landlords, For - Self-Employed
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