Tax consequences of separation and divorce

You may never have tax on your mind when a marriage or civil partnership falls apart. The tax impact shouldn’t be underestimated, as this runs the risk of missing key exemptions and liabilities.

There are two particular areas, that you should be mindful of when going through a separation, capital gains tax (CGT) and Stamp Duty Land Tax (SDLT). We’ve put together a short summary of tax consequences when going through separation and divorce.

What happens with CGT on separation?

Married couples and civil partners benefit from a capital gains tax exemption, whereby they can generally transfer assets to each other with no gain or loss arising in the process. This is known as a “no gain, no loss” transfer.

When married couples or civil partners separate, the no gain/no loss treatment continues for the transfer of assets to each other up until the end of the tax year of separation. After the end of the tax year of separation, the transfer of any asset becomes a chargeable event and CGT will be due on any gains arising on the transfer.

The precise timing of the separation can be difficult to decipher in some circumstances, but it’s generally considered to be when the couple decides to permanently split up.

This has always put intense pressure on those who separate close to the end of the tax year (5 April), particularly those with shared properties. It’s found that most people are either unaware of the removal of the capital gains tax exemption, or unable to organise their affairs in time to benefit from it.

What are the changes from 6 April 2023?

The draft legislation recommended by the Office of Tax Simplification, would form a part of the Finance Bill 2022-23 and take effect from 6 April 2023, proposing the following changes to be made:

1. Separating couples are given up to three tax years after the year they separate, to organise their affairs and transfer assets to each other at no gain/no loss.
2. The no gain/no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a divorce agreement.
3. A spouse or civil partner who retains an interest in the former family home can claim private residence relief when it is sold; and
4. For individuals who transfer their interest in the former family home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is ultimately sold. They will be able to apply the same tax treatment that applied when they transferred their original interest in the home to their ex-spouse or civil partner.

When does the SDLT exemption apply?

Married couples and civil partners who transfer property to each other may pay SDLT on any deemed consideration, which includes the release of any mortgage debt attributable to the share of the property transferred.

However, there is a SDLT exemption for mortgaged properties transferred on court order or a formal divorce settlement. Nevertheless, this doesn’t apply to transfers where a court order or formal divorce settlement is not in place. This means that transfers of mortgaged properties made within the CGT exemption period will not necessarily also be exempt from SDLT.

Summary

The additional time given by the proposed changes is welcome. It’s still vital that tax advice is sought when assets are being partitioned to avoid any hidden surprises for either side.

In a financial settlement, the pregnant gains on taxable assets is just as important as the asset value itself in the longer term. The tax position on such gains should be worked into the overall settlement.

How can we help?

We would recommend undertaking a review with one of our tax experts to help you gain the maximum benefit from tax exemptions. If you're looking to discuss any of the topics mentioned above, then please get in touch with our Tax Director David Portman (davidportman@lubbockfine.co.uk) or your usual Lubbock Fine contact.