Divorce and Tax: What You Need to Know
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Obtaining a financial settlement upon separation is often one of the most difficult aspects of the divorce process.
But, after putting the divorce settlement on a legal footing with a consent order, the question arises as to whether tax needs to be paid on any of the assets being transferred between ex-spouses.
In this article, we will consider the tax implications of divorce.
How much tax do you pay on a divorce settlement?
As a general rule, taxes do not need to be paid in respect of the divorce financial settlement.
However, this depends to some extent on the terms of the financial settlement and, in particular, timescales.
Let’s have a look at some of the various types of taxes that might apply and in what circumstances.
Capital Gains Tax
Capital Gains Tax (CGT) is a tax that must be paid on any profits made on assets that are disposed of which have increased in value. CGT normally arises if assets are sold at undervalue (eg if a house is sold at half its market value) or gifted (given away for free).
However, for purposes of divorce, CGT generally does not apply if transfers are made on assets before the ‘end of the tax year of separation.
What is the end of the tax year of separation?
The end of the tax year is 5 April – which means that if a couple gets divorced shortly before this date, they must ensure that any assets which they wish to transfer between them are made very quickly.
What counts as ‘separation’ can be subject to interpretation – unless there has been a court order to this effect – but government guidance refers to circumstances where “the separation is likely to be permanent”.
Is there a Capital Gains Tax on transferring property on divorce?
Property is normally the most important asset in a marriage and forms the bulk of a financial settlement upon divorce.
Fortunately, there is usually no CGT to be paid where the principal matrimonial residence is being transferred; these are treated as being made on a ‘no gain, no loss’ basis for CGT purposes as long as transfers are completed before the end of the tax year of separation.
Separately, Principal Private Residence (PPR) relief can normally be claimed for a certain period of time.
If one party moves out and transfers the home to their ex-spouse, the party moving out can only claim relief from CGT if the transfer is agreed upon within a period of 9 months after moving out.
Do I need to pay Stamp Duty if a property is transferred after divorce?
If a property is being transferred as part of a divorce settlement, there is no Stamp Duty Land Tax (SDLT) to pay.
However, if the property transfer does not specifically form part of the actual settlement and is instead transferred as part of a separate agreement, there may be SDLT due.
Do I have to pay inheritance tax on any assets transferred after the divorce?
Transfers of assets that are made from one ex-spouse to another before the decree absolute is issued will generally not be subject to any future inheritance tax (IHT) liabilities.
But any asset transfers which take place after the date of the decree absolute may potentially be subject to IHT if the transferring spouse dies within seven years of the transfer being made.
Are maintenance payments subject to tax?
In general, spousal and/or child maintenance payments are not considered taxable income in the UK. However, these payments will normally derive from money that has already been taxed (eg through PAYE and income tax) – so in that sense, it’s not entirely tax-free.
Do I need to tell HMRC if I get divorced?
People should inform HM Revenue and Customs (HMRC) if they:
- Get divorced
- Separate from their spouse
- Stop living with their spouse
Any of these changes can affect the overall tax situation of individuals which can result in overpayment or underpayment of taxes, so it’s important to let HMRC know about any change of circumstances as soon as possible.
Do you need to obtain a financial settlement upon divorce?
We offer a choice of consent orders from just £399 including VAT saving you up to a thousand pounds, where we will manage the process of obtaining you a consent order to secure your assets and finances
This involves having a solicitor complete all of the forms for you and filling them with the courts, so you don’t have to.