Tax and Divorce – navigating tax implications in divorce settlements: key considerations for separating couples
Divorce is never easy, and while the emotional aspects are challenging, navigating the tax implications can feel like walking a tightrope.
From Capital Gains Tax (CGT) to Stamp Duty Land Tax (SDLT) and even cryptocurrency, understanding these elements can save both time and money.
Here’s a breakdown of what you need to know👇🏽
1. Capital Gains Tax (CGT) on Property: What’s at Stake?
Have you ever wondered how your principal private residence (PPR) relief might change during a divorce? 🏡
If both parties remain in the home until it’s sold, the relief is likely to cover the entire gain.
But if one partner moves out, the final nine months of ownership are usually still exempt. However, if they leave more than nine months before sale then a tax charge could still arise.
For other assets like second homes, transferring them under a court order generally avoids immediate CGT charges – a process known as a “no gain, no loss” transfer.
However, delays or transfers outside of a court order can trigger CGT based on market value.
Timing is critical here! ⏱️
2. Stamp Duty Land Tax (SDLT): Are You Exempt?
Are property transfers during divorce always free from SDLT?
Yes -transfers tied to a court order are typically exempt, and even transfers outside of a court order can qualify as exempt as long as they are in connection with the divorce 🥳
This rule applies even when there’s a balancing payment involved, such as one spouse compensating the other for a more valuable property.
Although the transfer may be exempt, proceed with caution if you’re handling this without formal advice⚠️
3. Cryptocurrency and Tax: A Modern Dilemma
Cryptocurrency is no longer a niche investment – it’s becoming a common asset in divorce settlements🌐
Should one spouse transfer crypto to the other as part of divorce proceedings, were they to get the timing wrong the transaction may be subject to CGT based on the market value at the time.
But what if crypto is treated as a trading asset rather than an investment?
HMRC might consider this a taxable income transfer instead, which could result in higher tax rates.
Clarity on how the portfolio is classified is essential🔍
4. Inheritance Tax (IHT): Post-Divorce Transfers
Did you know that as long as a couple is still legally married, transfers between them are exempt from IHT?
Once the marriage is dissolved, transfers for less than full market value are treated as “potentially exempt transfers” (PETs).
This means that if the transferring spouse dies within seven years, the value of the assets could be brought back into their estate for IHT purposes😱
For farming businesses or other assets qualifying for Agricultural Property Relief (APR) or Business Property Relief (BPR), there may be additional considerations to factor into divorce negotiations🚜
5. International Properties: When Borders Add Complexity
Do you or your spouse own international properties?🌍
If one spouse retains these properties, they may face both UK CGT and foreign taxes on the transfer.
While double tax treaties can sometimes offer relief, the rules vary widely by country.
It is always worth consulting a specialist to avoid nasty (expensive) surprises😯
Why Professional Advice is Non-Negotiable
Whether you’re amicably dividing assets or facing complex negotiations, involving professionals – from tax advisors to solicitors – is crucial‼️
A court order not only ensures legal protection but also unlocks key tax benefits.
At In Accountancy, we understand the intricacies of UK tax law and can help you navigate them with confidence.
For more resources on divorce-related and other tax matters, check out our resources area and subscribe to our YouTube channel.
💡 Tax rules are constantly evolving. This guide is based on legislation for 2024–25, but it’s always wise to confirm the latest updates.
Would you like to discuss your specific situation? Please contact the IN Team and ask for Paul or Kathryn who will be happy to help 😊
