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Tax and divorce

Tax and divorce

When a couple are contemplating divorce, tax is normally the last thing on their minds. However, top London divorce solicitors recommend that expert legal advice is sought before a couple decide to separate as the timing of a separation and the transfer of assets between a husband and wife can create a liability to pay tax in circumstances where with legal and accountancy advice tax would not have been payable.

How can OTS Solicitors help?

If you need expert legal advice on your separation or divorce or the financial implications and financial settlement options then the divorce and family law team at OTS Solicitors can help you.

 

For a confidential discussion on how OTS Solicitors can help you please call us on 0203 959 9123

 

Tax and divorce

The government would say that it does not tax divorce.  The best London divorce solicitors would agree with this but would add that some couples end up paying tax because of their divorce and sometimes payment of this tax would not have been necessary if a husband or wife had taken early professional legal and accountancy advice.

 

Some divorcing couples may fear that what top London divorce solicitors are suggesting is entry into some sort of tax scheme, the likes of which have had much adverse publicity. That is not what top London divorce solicitors are recommending; just simply ensuring that the timing of any separation or transfer of assets is tax efficient leaving more money to be shared between the husband and wife.

 

Spousal maintenance and tax

Some spouses who receive spousal maintenance from the spouse or former husband or wife worry that the spousal maintenance may be taxable income and that, after payment of income tax, the spousal maintenance payments will not be enough to meet their needs.

 

In the UK, spousal maintenance is not treated by HMRC as taxable income. The best London divorce solicitors say that the rationale behind the treatment of spousal maintenance is that the person who is paying the spousal maintenance is taxed on their income. If the spousal maintenance were taxed as income on the part of the recipient then the same income would be the subject of double tax.

 

The best London divorce solicitors come across many situations where a husband and wife are both employed in a family business. In that scenario the earned income of both spouses will be taxed by HMRC although if the financially stronger spouse is ordered to pay spousal maintenance from his or her higher salary the spouse receiving the spousal maintenance payments will not have to pay tax on the maintenance.

 

Tax and child support

The same principles apply to tax and child support as to tax and spousal maintenance. That means that as the parent who is paying the child support was taxed on their income the parent receiving the child support does not have to pay income tax on the child support payment.

 

Tax and a lump sum cash payment

If, as part of a financial settlement or financial court order a husband or wife receives a cash payment, expressed as a lump sum order, the recipient will not have to pay tax on the transfer of cash. However, if the spouse paying the cash payment has had to sell family shares or investments then that might trigger a capital gain and a liability to pay capital gains tax. That is why the best London divorce solicitors recommend that any potential tax liability is taken into account in the overall financial settlement.

 

Transferring assets between a husband and wife

If a husband and wife decide to transfer assets between them during their marriage, the transfer of the asset should not attract tax. For example, a husband may transfer investments to his wife so she can open up an ISA in her name as the husband has already invested in an ISA for the relevant tax year. Alternatively, if a husband is a househusband and not earning an income a wife could transfer investments to her husband so any income generated from the income would be taxed at the husband's basic rate tax rather than the wife's high rate tax liability.

 

The best London divorce solicitors say that capital gains tax is not payable on the transfer of assets between a husband and wife as HMRC treat a husband and wife as ‘‘connected parties’’ for most capital gains tax purposes.

 

However if a husband and wife decide to separate and delay in transferring assets then they may lose their ‘’connected party’’ status and become liable to pay capital gains tax on the transfer of assets. That is why expert legal advice from top London divorce solicitors should be taken to understand the tax implications of the timing of a separation and the subsequent transfer of assets between husband and wife.

 

The best London divorce solicitors advise that the HMRC rule is that until the end of the tax year of permanent separation, the transfer of assets between a husband and wife occurs  on a “no gain and no loss” basis because they remain ‘‘connected parties’’.  Whilst the couple remain ‘’connected‘’, there is no immediate capital gains tax payable by either the transferee or transferor.

 

What does this mean in practice? If a couple decide to separate in late March and start divorce proceedings on the 5 April they only have until the tax year end on the 6 April to reach a financial settlement and transfer any assets between themselves to avoid the potential for a capital gains tax liability. On the other hand, if the couple had decided to permanently separate on the 7 April they would have twelve months to reach a financial settlement and transfer assets between one another. The best London divorce solicitors advise that the key date is the date of permanent separation and not the date of the issue of divorce proceedings.

 

If capital gains tax will be payable on the transfer of assets between a husband and wife it is vital that expert accountancy advice is sought to quantify the amount of the capital gains tax liability. This is so the tax debt can be taken into account in the overall financial settlement.

 

After the decree absolute of divorce has been pronounced a former husband or wife stops being treated as ‘‘connected’’ people. That means that transfers of assets between the husband and wife could generate a capital gains tax liability.

 

Tax on property transfers

Top London divorce solicitors advise that different rules apply to tax and the transfer of property. The first key consideration is whether a property is the family home or a second home or buy to let investment property. That is because different tax rules apply depending on the nature of the property and if tax property relief applies.

 

The best London divorce solicitors say that the vital point to check is whether a couple have “private residence relief” if they transfer a family home to a husband or wife.

 

International tax and divorce 

If a husband or wife is not a British citizen or the couple have non-UK assets, the treatment of tax and divorce can get even more complicated. That is why it is essential if there are international aspects that a husband and wife take expert legal and accountancy advice from top London divorce solicitors and accountants.

 

How can OTS Solicitors help?

For pragmatic expert advice on your separation and divorce and financial settlement options or for representation in financial court proceedings please call OTS Solicitors on 0203 959 9123 for a confidential discussion about how the divorce and family finance team at OTS Solicitors can help you. 

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