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Insights // 08 March 2024

Tax on Separation and Divorce – 5 Key Pitfalls

Associate solicitor Peter Hilton, in our Family Law team, explains five key pitfalls to avoid, in relation to tax, when separating or divorcing. 

For anyone separating from their long term partner, securing a sensible division of financial assets is often a top priority. Whilst there may be some dispute over how finances are divided, one thing almost all couples can agree on is that they would rather keep their assets within the family, for themselves or for the benefit of their children, rather than seeing them go to HMRC.

Some of the potential tax pitfalls to watch out for are:

1. Losing Relief on the Family Home

Save for those considering nesting arrangements, the vast majority of separating couples sell their family home or have it transferred into one parties sole name. Typically, upon selling your main home you would not be subject to any tax thanks to Principle Private Residence (PPR) relief. However, if one party moved out of the family home more than nine months prior to sale taking place, PPR relief ceases to apply to that party. The tax that may then be payable will depend on a number of factors, including each parties’ interest in the property, purchase and sale price, renovation works to the property, and several other factors. If one party has been living away from the family home it is important to take professional advice as there may be unforeseen capital gains tax implications.

2. Dividing Assets after the Tax Year of Separation – Transfer or Sale

Under current legislation, any transfers of assets between married couples are treated as being ‘no gain, no loss’. This means that whilst no tax is paid, the tax liability for any gain in value is effectively rolled forwards to the party who receives the asset. The same principle applies to transfers following separation. However, if assets are sold rather than transferred this may crystalise the tax payable which will need to be met in short order. Whilst liquidity from the sale of assets is often required on financial division, the benefits to transfer for immediate tax purposes should not be overlooked. Importantly, the tax will be deemed payable when the property is eventually sold at which point the seller would only have the benefit of one ‘nil rate band’ for capital gains purposes rather than two, so this is again something that should be considered carefully.

3. Assuming Income Tax on Spousal Maintenance

It is a common worry that whilst a proposed spousal maintenance figure may seem sufficient, it will be subject to tax and therefore be insufficient to meet needs. Thankfully, current tax rules mean all spousal maintenance payments are treated as net of tax, and no tax is payable by the receiving spouse.

If you are receiving maintenance from a party outside of this jurisdiction, it may be that tax is payable on those transfers. It is important to take advice on any international payments to ensure they are tax efficient.

Additionally, spousal maintenance is treated as unearned income by the DWP, and may reduce any receipts of universal credit on a pound for pound basis. Any proposals for spousal maintenance in cases involving universal credit.

4. Pension Sharing

This is a complicated area of law with numerous pitfalls and a raft of legislation and guidance surrounding the correct approach to dividing pensions built up during a marriage. Whilst tax is not always a primary consideration, issues such as the drawdown of one party’s tax free lump sum prior to separation or an individual exceeding the pension Lifetime allowance cap on lump sums drawn (25% of £1,073,100) can have a serious impact.

It is often the case that specialist actuarial advice is required to deal with the most tax efficient division of pensions and legal advice should be taken at the outset to avoid any unexpected impact on income during retirement.

5. Don’t Forget the Stamp Duty

One of the most common pitfalls arises on parties rehousing. Whilst they have done calculations to determine what equity can be achieved from a sale of the family home or division of other assets, they have not factored in the uplift on the price of purchase coming from stamp duty. This can often leave parties short of the funds needed to rehouse at the level they had envisaged and, whilst it is a relatively simple calculation, it is one not to be missed.

For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800. 

This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.

Peter Hilton

Peter Hilton

Associate Solicitor, Family Law

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