Tax planning during divorce and separation

By Ian Wright of www.taxinsider.co.uk.


They say that the four biggest stresses in a person’s life are death, moving house, changing jobs and divorce.

Divorce can have some serious tax implications. In fact, let us move away from the word divorce and focus on separation which is in fact far more important for tax purposes.

Divorce and capital gains tax

Married couples who live together enjoy the ability to transfer assets between themselves free of capital gains tax under inter-spouse tax rules.

If a couple separate and they no longer co-habit in the same residence, then the inter-spouse rules are lost in the next following tax year. For example, if you move out of the marital home in say January 2010 after a disastrous Christmas, then as from 6 April 2010 you will no longer be able to transfer assets to your spouse without possibly creating a capital gains tax liability.

Whilst I am sure most people in this position would not even dream of transferring assets to their ‘ex’, divorce lawyers certainly have a different idea!

As strange as it seems in this harsh cold tax world we (as accountants) can advise (from a tax point of view) that you leave the marital home as early in the tax year as possible to give yourself plenty of room for tax-free manoeuvres. Leaving on the 1 April is foolish; hang in there and leave on the 6 April, this being the first day of the new tax year.

Whilst still having the inter-spouse tax rules available you can transfer assets to your spouse without a capital gains arising. Such scenarios could come from transfer of share portfolios, buy-to-let property or land.

Divorce and transfer of business assets

You should not have to worry about business assets, such as close company trading shares or property used in business, since these can be transferred by using business holdover relief under s165 TCGA 1992 and therefore you can pass the potential gain to your spouse. 

But be aware that solicitors are clever enough to know that transfers of business assets do pass on the potential gain to the spouse and will try to take such a gain into account.

Divorce and the marital home

In some divorce cases the wife is awarded the use of the marital home until such a time that the children have finished their education and then the house is sold off and split between the two. This could prove to be a potential capital gains problem for the husband who is no longer living there and has no claim to principal private residence relief. 

There is, however, some hope with regard to the situation in that if a court awards the wife the property or a binding agreement is entered into, then one can rely on tax rules in relation to what is known as a ‘Mesher Order’. 

Put simply, a tax concession, known as extra statutory concession D6 (ESC D6), allows the husband in my scenario to still be entitled to full principal private residence relief on the marital home up until the court order or agreement triggers the time to sell. 

One particular problem with using this concession is that if the husband had bought a new house and lived in this as his primary residence during the time the former marital home was being lived in, he would forgo his entitlement to principal private residence on his new home in respect of the overlap. You can choose not to claim the concession.

Practical tax-saving tip

When the marital home is eventually sold off, check with your accountant/tax adviser whether it's better to pay tax on the former marital home or later on your current home.

This article has been provided by www.taxinsider.co.uk.

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Published on: March 16, 2010

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