We hope that the couples amongst our readership will continue to live long and happy lives together. Sadly statistics indicate that this is unlikely to be the case for all of them. Figures from the Office of National Statistics indicate divorce has been rising since the 1970s with 42% expected to end in divorce. Half of those divorces will be for couples in their first 10 years of married life. 

At such an emotional time it is not surprising that tax concerns take a back seat. However, not taking it into consideration could result in the unhappy couple finding unexpected tax bills adding to their woes. These are a few of the areas which should form part of divorce considerations. 

Home disposal

Gains arising from the sale of your home are not subject to CGT. The last 18 months of ownership will qualify for this exemption for a former home even when it is not occupied in that time. This is expected to reduce to 9 months for any sales taking place after 5 April 2020. Once one half of a couple leaves the family home, the clock will start ticking on this exemption. If the family home is sold long enough after this date, a CGT bill may arise on their share. This is made worse by an upcoming change in the tax due date for CGT on sales of residential property. The CGT for sales after 5 April 2020 will have to be paid within 30 days instead of nearly 10 months after the end of the tax year. 

Asset Transfers

Transfers of assets between married individuals are not subject to the normal rules for Capital Gains Tax (CGT). Instead they are no gain/no loss transactions, with the receiving partner effectively being treated as having purchased the asset at its original cost. This treatment continues for couples up to the end of the tax year in which they separate. 

After this date up until the Decree Absolute is granted a different set of tax rules kick in. The couple are treated as connected parties for this period. This means all asset transfers between them are taxed as if they were made at market value regardless of actual price paid. This tax rule is intended to stop related individuals moving assets around simply to reduce CGT but there is no exemption available for those who are just dividing up their collective assets. 

Inheritance Tax

Every individual has a nil rate band allowance for Inheritance Tax on their death. When one half of a married couple dies any part of this band not used for legacies to others is transferred to the surviving spouse. Unlike the rules for transfers of assets above, this rule persists until the Decree Absolute is granted. Whilst there is no way of avoiding this transfer, it may be worth taking the potential effect into account in any divorce agreements. 

A couple may also have prepared wills transferring assets to one another. Forgetting to update wills on divorce may not only cause family strife but could create Inheritance Tax issues as previous planning would no longer apply.

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