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There are several taxes that could be a factor during your divorce.
Capital Gains Tax
Capital Gains Tax is sometimes payable when you make a profit on an asset. It is often the tax that is most likely to apply when you separate or divorce.
Capital Gains Tax is calculated on the profit you make when you dispose of an asset. It’s important to remember that ‘disposal’ isn’t just a sale of an asset; it can also be when it is transferred into another person’s name, such as on divorce.
Any transfer of assets between spouses and civil partners are exempt from Capital Gains Tax.
A tax liability is therefore only likely to occur after the separation process has begun. This is because you only have until the end of the tax year after this process begins to transfer assets between the two of you without being hit with a tax bill.
If you transfer assets between the two of you during the tax year of separation, it is considered ‘no gain/no loss’ and no Capital Gains Tax is due.
Here’s an example. You own a piece of antique jewellery that you paid £5,000 for. It is now worth £25,000.
If you transfer this to your spouse during the tax year of separation then no Capital Gains tax is due.
If you transfer this to your spouse after the end of the tax year in which you separate (5 April) you will have to pay Capital Gains Tax on the profit (£20,000), less any annual Capital Gains Tax exemption you haven’t used.
Capital Gains Tax will typically not apply to the sale of a family home. If your home is sold and the proceeds split between the two of you, any profit you have made is exempt from Capital Gains Tax for both the spouse who is living in the property at the point of sale, and the other spouse. This is as long as the sale takes place within nine months of the departing spouse moving out of the property.
While it is not payable on a person’s main residence, Capital Gains Tax may apply to the sale of second properties, including holiday homes and Buy to Let properties.
Note also that any transfer in the ownership of pension savings are not subject to Capital Gains Tax.
Income Tax
Income Tax in the UK is calculated on an individual basis. This means that every individual has their own personal tax allowance and pays personal tax on their own income. Separation or divorce does not affect this.
Note that there is no Income Tax to pay when you transfer assets under a divorce settlement.
When the financial settlement is made, it is possible that, as part of the division of assets, you receive some income-generating assets such as savings accounts or shares. In this case, Income Tax will be due on any income generated by these assets in the normal way.
Note that, for Income Tax purposes, you are treated as ‘no longer married’ from the date that you permanently separate.
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Inheritance Tax
As transfers between spouses are exempt from Inheritance Tax, any transfers between you and your spouse are tax-free until the date of your Decree Absolute.
In addition, HM Revenue and Customs accepts that any transfer of property as a result of a court order is exempt from Inheritance Tax, even if it takes place after the Decree Absolute.
Similarly, any maintenance payments you make (either child or spousal maintenance) are likely to be exempt from Inheritance Tax as they are classed as ‘regular payments from income’.
Any other transfers that are made between you and your ex-spouse after the Decree Absolute are treated as Potentially Exempt Transfers. This means that Inheritance Tax could be payable on the value of this transfer if you die within seven years of making the gift.
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Stamp Duty
Stamp Duty Land Tax is payable on transactions including land and property. Any property that is transferred on divorce is generally not subject to Stamp Duty as long as:
- The transfer has been ordered by the court
- The transfer has been agreed by the parties in connection with the divorce/dissolution
If neither of the above apply, Stamp Duty will be payable.
If there is no such agreement or Order, then Stamp Duty will be payable. The tax is based on the consideration given for the transfer, which includes any cash payment, and any liability under a mortgage.
Stamp Duty will also be payable on the purchase of a new property: for example, if one spouse decides to buy somewhere new to live.
There may also be an additional Stamp Duty charge as, if a person buys a second property while retaining an interest in another, 3% additional tax is payable. During a divorce settlement, this additional charge may be avoided if the other property is not their main residence and a court order has been made for the benefit of their ex-spouse.
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The information on this website is to be considered a guide and is therefore not legal advice. You use this information with the understanding that Wiselaw does not accept liability for any direct or indirect losses as a result of anyone relying on or acting upon the information on this website. Whilst we endeavour to provide accurate information, Wiselaw does not accept liability for any errors or omissions on this website.
