TAX ISSUES ON SEPARATION AND DIVORCE

Independent taxation of married couples

Main taxes relevant Capital gains tax (CGT) Inheritance tax (IHT) Income tax SDLT

CGT Charged at 18%/ 28% Gifts s.17 Other connected party disposals s.18 Very limited reliefs Annual exemption Asset swaps= double trouble

IHT Transfer of value 40% death rate 20% lifetime rate and catch up on death PET- 7 years. Nil rate band Very complex- numerous traps.

Income Tax Joint asset beneficial interest splitting Settlements legislation

General presumption: If there is any transfer of assets or income from one person to another: there will be a tax charge unless there is an exemption. The tax charge is likely to be on the market value regardless of the amount of consideration, unless its genuinely arms length.

Intra-spouse exemptions (1) Does not apply to co-habitees Applies to Civil Partners equally: (CPA 2004) Generally exempt but don’t presume CGT: Section 58 TCGA 1992 IHT: section 18 IHTA 1984

Intra-spouse exemptions (2) SDLT no reliefs Income Tax: No general reliefs. –Must look at specific ICT charging provisions

CGT spouse exemption (1) Must be living together as spouses in the tax year of transfer (April 6-April 5) Presumed living together unless: –Separated under a court order –Separated under a deed of separation –In fact separated in circumstances in which the separation is likely to be permanent ITA 2007 s 1011/ section 283(3) TCGA 1992

CGT spouse exemption (2) Pre-divorce separation an issue –Connected until decree nisi. S.17 issues. Special rule for the family house disposed of after separation (extends PRR). 5 April following separation is KEY DATE

IHT Spouse exemption ends at decree absolute Transferee spouse must be UK domiciled Post decree asset swaps not a TOV if equal in value. Transfers under court order usually exempt if no gratuitous intent. S.10 IHTA

Principal family wealth Family home Family company Pension pots Trusts

Family Home Principal residence relief Gains on home is tax free Multiple properties? Only 1 election Spouses living together can only make one election Must be resident. What if spouse moves out? Last 3 years of ownership exempt

Family Home (2) Last 3 years of ownership exempt –Period about to be shortened Must be ‘resident’. What if spouse moves out? –If share transferred to spouse then transferor deemed to be in occupation. –Does not apply on a sale to 3 rd p.

Family Home(3) What if spouse buys a new property and wants to elect for PRR on that?

Family company Rarely transferred in settlement Wife sometimes given shares for tax planning reasons during marriage- must be recovered after separation. –Possibility of ER. Trading co 5% plus a job at the co. –Company repurchase of shares (CGT). Must be a trading co.

Trusts Courts will try and access trust capital, even if legally protected. Distributions could be taxable –Disguised remuneration charge could fall on beneficiary if an EBT –Treat the payment out as employment income Always take specific advice

Income Tax No deduction for maintenance payments Pensions and life policies –Rules are very complicated –Always take advice on a case by case basis

SDLT No SDLT if no consideration. Issue with mortgaged property: –Undertaking mortgage is consideration for the transfer –Specific SDLT exemption:

Other points Remittance basis taxpayers? –Cash or assets brought to the UK could be remittance triggering capital gain or income tax charge

Joseph Howard Tax barrister Tanfield Chambers 2-5 Warwick Court London WC1R 5DJ Tel: