Separating from your spouse - what about the tax?

Unfortunately along with the personal and other issues there are a few tax issues which need to be considered as the financial side of a divorce settlement is being agreed. The same issues will apply to the dissolution of a civil partnership

The most important thing to be aware of is that the special treatment for Capital Gains Tax purposes for transfers between spouses only applies for a tax year where the couple are married AND living together at some point in the tax year (to 5 April). This means that from the 6 April following the separation transfers and gifts of assets will be subject to Capital Gains Tax in the normal way

In contrast the special treatment for Inheritance Tax purposes applies to spouses until the time of divorce or dissolution. This means that transfers are not chargeable to IHT (subject to special rules if one spouse is not UK domiciled).

If assets such as shares, second homes, buy to let property or businesses interests are being transferred between spouses are part of the financial arrangements, it is therefore vital that advice is taken on the Capital Gains Tax implications. Even if no tax is payable immediately it is important that you know what tax might be payable in the future if the asset is sold – it may affect the overall detail of the settlement.

1) If the is an exchange of shares in different properties, there is a concession which allows the Capital Gains which would otherwise arise to be deferred.

2) If the property is subject to a ‘Mesher’ order where one spouse is not entitled to their share until the children reach a specific age or leave education, then they should still be entitled to Principle Private Residence (PPR) relief and the gain not be taxable.

3) The last three years of ownership of a PPR are eligible for relief even if one spouse has moved out and there another concession which can extend this if they do not have a new PPR.

All of these areas can be complex and it is important that you understand the tax implications of separation, divorce and any transactions involved in the financial settlement.