When getting a divorce, the liability and payment of tax are usually not in the forefront of your priorities. However, there can be unanticipated tax charges that arise if care is not taken.
Here are some examples:
Assets
When married couples own assets, particularly shares and properties, it is common to have these divided between them in the event of a divorce. If assets are transferred, the position in relation to Capital Gains Tax (CGT) needs to be considered carefully
Spouse Exemption TRAP
There is a Capital Gains Tax exemption that treats transfers of properties from one spouse to another as a ‘no gain, no loss’ basis. This ceases to apply after the end of tax year that permanent separation occurs. The date of the actual divorce is irrelevant for this purposes.
Date of Separation
The date of separation is vital when establishing the point which the Capital Gains Tax exemption ceases to apply. However, this is often subjective especially when the separated couple continue to live in the same property.
Generally, the date will be:
- the applicable date of a separation by court order or deed of separation
- the date on which couple separated in such circumstances wherein it is likely to be permanent
Matrimonial Home
If the matrimonial home has always been the main residence, Private Residence Relief (PRR) will be available. If the transfer takes place within 18 months of the date the transferor moves out, any gain will be fully exempt.
However, if there have been periods of absence or there is more than one property that has been used as a home, matters will be more complex.
There is still an opportunity to mitigate any Capital Gains Tax charges. When the disposal is more than 18 months after the moving out date, HMRC allows the transferring spouse to continue to treat the former home as their main residence right up to the date of transfer or, if earlier, the date their spouse ceases to occupy it as their main residence.
Business Assets
If one spouse wishes to pursue a shared business interest alone following the divorce, a settlement should therefore include the transfer of an interest in a business. The business asset gift holdover relief is applicable where the transfer has been made in accordance of a court order and there is no consideration received.
Family Companies
Shares in a family company are taken into account when considering the value of all the marital assets. For example, if the family shares are the only asset, it is likely that the court would order the shareholder to pay over cash or other assets that is equivalent to the value of the determined share.
The most significant asset will likely be the matrimonial home. If this is transferred, consider looking to maximise the Private Residence Relief available.
If shares or assets in a family business have to be transferred under a court order, gift holdover relief can be claimed. Consider looking whether a share buyback could be used for efficient settlement.