Divorce tax planning

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The breakdown of a marriage is a painful process and the concept of “planning” for the tax consequences (of all things) may seem a low priority at best and in poor taste at worst, yet it merits consideration.

In relation to Capital Gains Tax (CGT) it is the date of separation rather than divorce which is key. Spouses and civil partners who are living together can pass assets from one to the other with no chargeable gain arising. This means that no chargeable disposal for CGT arises at that stage when the recipient eventually disposes of the asset they will be assessed for any CGT liability upon the original acquisition cost. The ability to make these inter spousal transfers without crystallising a CGT liability is lost at the end of the tax year when the parties separate permanently. A separation towards the end of a tax year may therefore mean that precious CGT exemptions are lost through lack of time to plan.

A home occupied for use as principal private residence (PPR) is exempt from CGT on sale – but this may be lost after three years or if in the meantime the vacating spouse elects to transfer their PPR exemption to an alternative property.

The position for Inheritance Tax (IHT) is slightly different. Transfers of assets between spouses on death remain exempt (without a ceiling) from IHT until Decree Absolute – whether or not the parties are living together . Disposals of assets by a tax payer are “potentially exempt transfers” (PETs) – so if assets are transferred after Decree Absolute they are a PET and may give rise to an IHT liability should the “Donor” die within seven years. This is a slight simplification as other exemptions might arguably apply but care is needed.

The point is that it will sometimes pay (especially if for example there are second homes or other significant assets such as businesses or portfolios of investments) to consider transferring certain assets ahead of a final settlement. An unwanted tax liability only reduces the pool of resources available to each party.

 

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Jeremy Sogno
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