The end of the tax season and divorce: are your financial assets protected?
Partner Hazel Wright discusses how the timing of divorce impacts tax payments.
“Divorce Day” falls on the first working Monday in January (in 2018, this was 8th January), when the Press tell us that there is a spike in initial enquiries to solicitors from divorce clients. Don’t rush to file for divorce then. Financially astute spouses will be advised to consider the tax implications of divorce and may wish to delay filing until the first working day in the tax year 2018/19 (Friday 6th April).
The Government is taking steps to make divorce itself both cheaper and more user-friendly—for example it will soon be possible to go through the whole process online—we should not forget the court fee of £550, which the Government has admitted makes 100% profit. The Press will continue to report on “quickie divorces” which are seldom achievable in less than 4 months and do not take any account of the necessary rearrangement of financial ties, resulting in a court order, for a clean break or at least clarity as to amount and timing of the severing of ties.
It remains essential to take professional advice, especially when navigating the byzantine system of tax payments surrounding a separation or a divorce (be it from a marriage or a civil partnership). Meanwhile, below are some digestible tips on separation and divorce as the end of the tax year approaches.
- Remember that the timing of separation and divorce can affect the timing of the payment of Capital Gains Tax (CGT).
- If your permanent separation starts before the end of the current tax year (which ends at midnight on Thursday 5 April 2018), any divorce-related transfer of assets liable to CGT will mean that tax is payable with other tax due for this tax year.
- If you separate permanently in the tax year 2018-2019, but decide to delay your divorce or do not complete your divorce (including getting decree absolute) in that tax year, again any CGT arising from divorce arrangements will have to be paid for the tax year 2018-2019. But if you separate and complete your divorce all in the same tax year (starting 6th April 2018), the transferor of the asset does not pay CGT at all, and the recipient only pays the CGT when eventually disposing of the asset
- Check if tax on spousal maintenance is affected by different rules in different legal jurisdictions. For example, in England and Wales, spousal and child support is paid out of the net income of the payer. This means that the contribution to the tax system is greater, as tax is paid by the higher earner. It is currently the opposite in the US. The payer can claim tax relief on spousal (but not child) support payments, so the contribution of tax is lower. This rule can be changed by agreement. But from 1 January 2019, this will switch round. The payer cannot make deductions from gross income, to reduce the tax payable. The payee will not have to pay tax on support received. That is the same as the UK’s position. If you or your spouse is a US citizen, you may want to review your obligation to pay spousal support and to negotiate the figure with the tax change in mind.
- Move your funds out of reach if separation and/or divorce is imminent? If you put spare cash into your pension fund by the end of this tax year, the Government gives you 20% extra contribution; but you have not put the funds out of reach, even if you cannot draw on your pension now. On divorce, the court has the power to make you share your pension with your ex-spouse. It can freeze the 25% cash that you can withdraw later. Further if there is a court order to give this cash to your ex-spouse and you won’t sign the papers, the court can appoint an attorney to sign for you.
- Forget that separation is defined slightly differently by HMRC and by divorce legislation. Both are a question of fact. For UK tax purposes; you must be living “in such circumstances that the separation is likely to be permanent”. In divorce law, families often have to remain living in the same house until the financial split is worked out. However, they must live in separate households. The adults must no longer share a bed, cook meals, and do the laundry together and so on.
- Forget that if you carry on owning the family home, but no longer live there and decide to buy a new home, that new home is deemed a second home and is subject to the additional stamp duty rate of 3%.
- Remarry after divorce but before all financial arrangements are concluded in a court order. If you do, you cannot ask the court to make an order, and will mostly be stuck with an informal arrangement that may not be binding.
Please find a link to Hunters Solicitors’ Family Law department here.