Tax issues can often rear their head in financial settlements. Ahead of a divorce, couples often want to know what tax liability is linked to specific areas in their own proceedings. We examine key facts and questions related to the financial and tax implications your divorce may bring about.
Income tax when transferring assets in a divorce
During divorces, assets are frequently transferred, be this via the sale of the family home or the sharing of a pension. Note that there is no income tax to pay on the transfer of assets when divorcing, but for those that generate an income, e.g., savings income tax will be payable.
What about Capital Gains Tax?
Capital Gains Tax is a tax paid on profits made from the sale of financial assets that have seen an increase in value. Everyone has a Capital Gains Tax allowance which is currently £12,300. You won't have to pay tax on this amount, but anything over, you will. Rates vary depending on your taxable income, and range from 0%, 15% or 20%. CGT is payable on property assets (excluding a family home), business assets, shares (not including pensions and ISAs) and possessions valued over £6,000.
As it stands, no Capital Gains Tax is payable on the transfer of assets if the transfer is completed within the tax year that you permanently separate from your spouse. Note this includes Civil Partners who are separating too. In law, this is called the principle of 'no gain no loss'. This often short deadline can contribute to couples feeling pressured to reach an agreement in a hurry.
Changes to Capital Gains Tax on asset transfers
To relieve this onus on couples already going through the challenges of divorce, new rules on asset transfers, detailed in the Draft Finance Bill 2022-2023, provides an extended window of three full tax years for making a 'no gain no loss' transfer'. The bill also sets out that if the assets form part of the divorce agreement, they will be given unlimited time.
Divorcing couples are therefore set to benefit when the new law is introduced on 6th April 2023. Current tax year time limits do not take into account the period in the tax year when a couple decided to separate. This means that if a couple decided to part ways later on in the tax year, close to the next one, they can have as little as one month to successfully transfer assets without CGT implications. This financial pressure is removed with the extended period given, allowing divorcing couples to focus on other aspects of their divorce.
Make sure you plan for tax when divorcing
Despite the introduction of the new CGT rules, it's always advisable to think ahead and bring tax into the equation when planning a financial settlement with your ex-spouse. This means looking in detail at each of your tax positions and what the implications could be, for example, if two properties of equal value are split but one has acquired more profit than the other, one party will have to pay CGT on their increased profit, thus not providing an equitable divide.
Seek specialist advice
Dealing with financial issues in a divorce settlement can become complex when there are numerous and different types of assets to consider. As well as seeking the help of an experienced family lawyer, it's worth speaking to a financial adviser too, to help you further understand how tax implications arising from a divorce will affect your future financial position long after you have separated.
