When a marriage or civil partnership ends with separation there will usually be little thought about the possible tax implications involved with a divorce.
This is understandable due to the circumstances, but there are definitely some things that you would be wise to consider in terms of taxation.
If you find yourself in this situation then you should seek advice as soon as possible so you can limit paying any unnecessary tax. Legislation around this subject can change, so it’s best to make sure that you’re aware of the latest divorce tax laws.
In this post, our high-net-worth divorce lawyers will discuss the tax implications of going through a divorce. Knowing these could save you a lot of headaches and money if you ever find yourself in a similar position.
Married couples tax refund in the UK
Marriage tax refund in the UK is available to couples who are married or in a civil partnership. Marriage tax allowance, as it is also known, can be claimed if the following requirements are met:
- If someone is married or in a civil partnership but isn’t in receipt of married couples allowance.
- If you earn less than your personal allowance, therefore do not pay tax (an annual income of less than £12,570).
- Your partner pays tax on their income at the basic rate (an annual income between £12,571-£50,270).
Does your tax code change when you are married?
The partner that earns the larger amount will get £1,260 added to their basic income allowance. As a consequence, the partner receiving the marriage allowance will have their tax code changed to M.
CGT on divorce
If married couples, or those in a civil partnership, transfer or gift any assets between each other then it is done so on a no gain/no loss basis.
This means that no taxable gains arise on the transfer of assets. At the moment, this still only applies to couples who have lived together at some stage during the tax year.
When the transfer of assets takes place after the tax year in which the couple separated then it is subject to capital gains tax (CGT) in the normal manner as it is seen as a normal disposal.
As of April 6th 2023 there will be a longer period of the no gain/no loss rule relating to transfer of assets. The period is up to three years after the couple stop living together.
Property – the family home
The family home can be of huge significance to a couple going through a separation or divorce, especially if there are children involved. Selling the house immediately when divorce occurs is usually not a practical or viable option.
With this in mind it’s vital that the tax implications are considered when the family home is then sold or transferred later down the line.
If there are any gains made when disposing of an individual’s main residence then these gains are exempt from CGT. This same rule applies for couples going through a divorce if the property has been their main residence throughout their ownership.
If an individual who is going through a divorce moves out of the main residence and rents or buys another property, they will still be able to claim exemption from CGT when the property is eventually sold.
However, an individual can come to an arrangement should the property be sold and they have transferred their share of the house.
The arrangement can state that the individual retains the right to some or all of the proceeds when the house is sold.
The disposal date for the departing individual is treated as being the date of the original transfer and the disposal is seen as being on a no gain/no loss basis.
Income tax is usually separate to each individual so divorce shouldn’t really carry any consequences over to income tax.
The only time divorce can affect income tax is if income generating assets are transferred during a divorce settlement.
Brown Turner Ross: experts in divorce
We understand that divorce can be a stressful time for couples, which is why having the tax side of things explained can make things that bit easier.
We have a team of helpful and friendly staff who have extensive experience in divorce procedures and tax laws.