Do I have to pay tax on my divorce settlement?
The type of assets that you and your spouse have and when you and your spouse separate will determine whether tax is payable and when it is payable.
How is tax factored into a divorce settlement?
When looking at the value of matrimonial assets, it is the net value that is relevant. Therefore if you have assets that will attract tax, usually Capital Gains Tax, when they are sold or transferred between spouses, the tax needs to be calculated and taken into account when calculating the total assets before you decide how they should be divided between the couple.
For example, if a couple jointly own a second property, a holiday home, which is worth £300,000, but if sold they would each have to pay Capital Gains Tax of £30,000, the value of the property taken into account within the divorce is £240,000.
Which assets attract tax?
The family home does not usually attract tax when it is sold or if transferred to one spouse, provided that it is the couple’s main residence, as it will qualify for Private Residence Relief in most cases.
Holiday homes or investment properties, if they have increased in value since they were purchased, are likely to result in the payment of Capital Gains Tax when they are sold or transferred to one spouse, as will some investments. Shares in private limited companies are also likely to attract Capital Gains Tax if sold or transferred to one spouse, although some tax reliefs may be available to reduce the tax payable.
With regard to payments of child maintenance and spousal maintenance, these are paid out of income that has already been taxed, so the recipient of these does not have to pay tax upon them.
Does the date the assets are sold or transferred impact the tax payable?
If an asset is sold to fund a divorce settlement and tax is payable on its sale, it does not matter when it is sold, the tax will have to be paid. Given that we all have annual allowances for Capital Gains Tax there may be some advantage to assets being sold in different tax years, if a few assets are being sold within the divorce that attract tax.
Where an asset is transferred from one spouse to the other, if the transfer takes place in the tax year of separation, the total gain is retained by the spouse who is retaining the asset and they will pay the tax when they sell the asset at a later date. If the asset is transferred after the tax year of separation, the spouse that is transferring the asset will have made a disposal for Capital Gains Tax purposes and will have to declare this gain and pay the tax. In this scenario it is important that the spouse who is transferring the property has sufficient cash from which to pay their tax as part of the divorce settlement. When the transfer takes place does not reduce the tax payable, but it dictates when the tax has to be paid and which spouse has to pay the tax.
The date a couple separate can be very important from a cash flow perspective when looking at their financial settlement. Some couples agree to transfer properties and shares in companies before they have reached a financial settlement, so that the transfers take place in the tax year of separation, thus avoiding having to find funds to pay tax liabilities at that juncture. Transferring the assets before a financial settlement is agreed does not change the financial claims that each spouse has within the divorce.
If you are experiencing problems in your marriage and have assets that could attract a payment of tax if transferred to your spouse or sold to achieve a divorce settlement, you should take advice from a specialist family lawyer and an accountant, in order to see what the likely financial settlement will be if you divorce and what tax is likely to be payable as a result of this.