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Married, separated or divorced: how does your marital status affect your tax treatment?

News / / London, Mayfair (London)

The tax implications arising out of a divorce, separation, or even marriage could be diverse and unforeseen. Although tax implications may not be your first priority upon separation, it is always wise to seek advice early on in the process, and be aware of possible tax liabilities depending on the outcome of the proceedings.

Capital Gains Tax (CGT)

Married couples can transfer chargeable assets between themselves without any CGT arising. Essentially, the transferee is seen as having acquired the asset for the same price as their spouse originally paid for it, so there is no taxable capital gain at that point. The transferee will have to pay tax when they later dispose of the asset upon the full gain from its original acquisition value. 

After separation a couple will be treated the same way until the end of the tax year in which the separation took place. This means that couples who separate on 6 April will be able to transfer assets CGT-free right up until 5 April the following year. If separation takes place in e.g. February, then there would be only a month or so when transfers could be made free of CGT. It is very important that timely advice is obtained in this situation and action is taken.

Until the date of the Decree Absolute (which legally ends the marriage), and after the tax year of separation, the spouses will be seen as “connected parties” for CGT purposes. After the year of separation and before the Decree Absolute, relevant transfers will usually be deemed to have taken place at market value of the asset, regardless of what is actually paid.

The family home is often the main asset in divorce proceedings and it is usually eligible for private residence relief if transferred or sold and therefore not subject to CGT. However, on separation, the spouse who moves out of the family home may have a different main residence. In these circumstances, relief will still be available for a period of nine months after they have moved out, any disposal after this period could trigger a CGT charge.

Other real estate assets may have a liability to Stamp Duty Land Tax (SDLT) particularly if mortgages or loans are secured on them.

Inheritance Tax (IHT)

Married couples can transfer assets between each other without triggering future IHT liabilities, this continues through the period of separation up until the decree absolute (provided both spouses have the same legal domicile).

After the Decree Absolute has been pronounced, any transfers will become “potentially exempt transfers” and will only be considered exempt of IHT if seven years passes before the donor dies. Transfers made in relation to a court order, including the creation of a settlement, are not usually considered “transfers of value”. Further advice should be sought in this area before a transfer is made.

Your Will is not nullified upon divorce as it is upon marriage and therefore you should seek advice in relation to a new Will when you re-evaluate your inheritance tax planning.

Income Tax

Married couples are taxed separately from each other and so divorce and separation do not usually have an impact on an individual’s income tax position.

After the divorce maintenance payments may be part of the final settlement. Maintenance payments are not taxable on the recipient, and indeed are not treated as income, meaning the recipient’s ability to seek other means tested benefits is not affected by the maintenance they receive. Conversely, maintenance payments are not tax relievable for the payer.

If you have any questions, or would like more information and advice tailored for your situation, then please contact our specialist tax planning department or family law department.

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References in this note are to matrimonial cases, but the same tax principles apply to civil partnerships.
John Burrell

John Burrell Consultant, Head of Family

Eleanor Bing

Eleanor Bing Associate

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