Business Tax, Capital Gains Tax, Personal tax, Tax Planning, Taxation

Understanding the tax implications of divorce

By RJP LLP

Understanding the tax implications of divorce

A recent court case between a married couple, ‘Owen v Owen’, is a useful reminder of the tax treatment following separation and divorce. In this case, the husband and wife did not actually divorce, but they had entered into what could be deemed to be a permanent separation.

Tax tends not to be the first thing that comes to mind when a couple is separating, but it’s worth being aware of the rules nevertheless.

A married couple is permitted to make capital gains tax free transfers of assets between one another based on the “no-gain no-loss” rules which apply to inter-spouse transfers and this also applies to partners in a civil partnership. The tax free status stops after a couple separates, either under a court order, by deed of separation, or because they become permanently separated even though they are not divorced.

Tax free transfers between spouses continue however to be available until the end of the tax year in which they separate. This has interesting tax consequences; if a couple separates in March for example, it gives them very little time to sort out the ownership of assets without having to consider the tax implications of any transfers. This can be contrasted with the position where a couple separates early in a tax year, and then has an entire year to sort out the ownership of their assets and make any transfers, without having to consider tax issues.

In tax years following separation, where a couple is separated but not divorced, for tax purposes they are regarded as ‘connected’ by HMRC. This means the special tax rules which govern transactions between connected persons will apply. In this situation, any transfers are treated as taking place at open market value.

For everything you need to know about tax if you are divorcing, read our earlier blog on the topic.

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