Is a Divorce Settlement Taxable?

16 August 2017

In England and Wales the majority of divorce settlements will not be taxable. Whether additional tax is paid will depend on the individual circumstances of your divorce case. The main tax provisions which relate to people going through a divorce or separation cease to apply when the relationship has broken down, rather than by reference to the date of Decree Absolute or Final Dissolution Order.

The following taxes may be relevant, and we would advise that you should seek independent legal advice, if you believe that any of these may apply to you.

Income Tax

Income Tax can be affected in a number of ways, and should be considered before divorce or dissolution. For example:

  • If you receive the high-income child benefit tax, you would only be liable to continue to claiming this until separation from your spouse/civil partner.
  • It is more common for jointly held assets to be transferred to one person upon separation. However, in the event that the assets remain joint, Income Tax will be calculated by reference to the exact percentage of ownership on separation.
  • It is not usual for maintenance payments to be taxed, however in certain circumstances, maintenance payments relief is available. For example, if your spouse/civil partner was born before 6th April 1935.

Inheritance Tax (IHT)

In the case of Inheritance Tax any transfers between UK-domiciled married couples continue to remain tax-free until the date of the Decree Absolute or the Final Dissolution Order.

If your financial settlement upon divorce involves maintenance payments then these are likely to fall outside of the Inheritance Tax rules, as they would be classed as regular payments out of income.

It may also be the case that when you resolve your financial matters, that a Trust is created. A Trust is established when a Trustee holds property on behalf of other people. For example, if a property was to be held on Trust for the benefit of children following a divorce. If a Trust has been established there will undoubtable be complexities that will need to be discussed with an expert in these matters, and specialist tax advice should be sought.

Stamp Duty Land Tax

When people separate there is often a property involved which has been the family home. If the property is to be transferred, then it will be exempt from Stamp Duty Land Tax, provided that the transfer has been ordered by a Court or any agreement between the parties in connection with the divorce or dissolution.

If there is no such agreement or Order, then Stamp Duty will be payable. The tax is based on the consideration given for the transfer, which includes any cash payment, and any liability under a mortgage.

Capital Gains Tax

Capital Gains Tax is probably the most relevant of all of the taxes which will effect separating couples.

When considering whether Capital Gains Tax is payable you should consider the date on which assets are transferred and the amount that will be taxable if a transfer of property happens after the tax year of separation.

When people are separating they are still legally married or civil partners, until such time as they receive a Decree Absolute or Final Dissolution Order. However, when these Orders are made former spouses and civil partners will no longer be considered to be “connected persons” for the purpose of Capital Gains Tax. HM Revenue & Customs (HMRC) will then consider whether there are any tax consequences of selling a property.

In the majority of cases, when there is the sale of the family home, Capital Gains Tax will not apply. However, in some circumstances people may have more than one property, or upon separation, may need to remain on the mortgage of the family home, but wish to purchase their own property. In these circumstances Capital Gains Tax may apply.

Within divorce/dissolution Financial Orders it is common for pensions to be shared between spouses or civil partners. Pension provision is not a taxable asset, and therefore there will be no Capital Gains Tax.

Bearing in mind the seriousness of tax and its implications you should always seek legal advice, and advice from a financial adviser/tax specialist in the event of divorce, especially if your assets are complex.

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