Separation and Divorce Implications For Tax

Unfortunately, at this time of year the pressure of Christmas may result in slight disagreements between couples. The reality is that the unhappiness may have been looming for a while but after a little drink either an argument occurs, or confidence runs high at the office party.

Divorce Implications For The Home

Whilst the private residence may be registered in one name, it does not prevent the other spouse having a beneficial interest. A starting point is to treat capital interests as equal. Ultimately, the capital interests will be by agreement between the couple or by the courts.

Transactions in connection with divorce and the dissolution of a civil partnership are exempt from stamp duty land tax (SDLT). The transfer needs to be made in pursuance of an order of a court to divorce/dissolve. Higher rates of SDLT apply where someone buys a second residential property, and this has been removed when that purchase is in connection with the pursuance of an order of a court to divorce/dissolve.  

When the transfer of the property between a couple occurs within the tax year of separation, there is neither a gain nor a loss. However, when the transfer occurs in a year of assessment after the year of separation, the consideration is taken to be the market value at the date of transfer. Obviously if the separation is a result of the Christmas office party fling, there are only a few months left before the end of the tax year. When the transfer is ordered by the court, the consideration will be the market value.  Therefore, when the transfer is after the assessment year of separation, a capital gains tax (CGT) liability may arise subject to the availability of the private residence relief.  

Relief for gains arising on the private residence is given when the following conditions are met: 

1. The disposal is pursuant to: 
   1. an agreement with the spouse or civil partner made in contemplation of the dissolution or annulment of the marriage or civil partnership, or 
   2. a separation order, or 
   3. that the separation is likely to be permanent; or
   4. by order of a court a decree of divorce, nullity or dissolution is granted.
2. The dwelling house (or part of) continues to be the main residence of one spouse or partner.
3. The individual seeking the relief has not provided notice that another residence is to be treated as their main residence.

Divorce Implications For Business 

A transfer may be made by agreement or under a court order. If the transfer is after the year of separation, it will be a disposal for CGT purposes taking place at the arm’s length value. When shares are disposed of for consideration, stamp duty may be due. If property is disposed of for consideration and not between spouses, SDLT may be due. 

It is also important to consider the VAT registration and whether if the business is divided, a registration or deregistration is required. 

Gifts of Business Assets

Holdover relief may be claimed for gifts of:

• Business assets
• Unlisted shares in trading companies
• Agricultural land
• Chargeable transfers for inheritance tax (IHT) purposes

Transfers into settlements would be a chargeable transfer for IHT purposes.

If one spouse or partner receives something in return for the asset they could be liable to CGT on the excess of the value over the base cost. The balance could be held over.

If the asset is transferred under the provisions of a court order or a consent order, there is no surrender of rights constituting actual consideration.

Rollover Relief

When business assets are transferred, a gain arises and holdover relief is not available, the transferor may be able to benefit from rollover relief.  The relief may be available when the spouse or partner sells a business asset to the other and realises a gain.  

The relief allows CGT to be deferred on the sale of a business asset when replacing it with another business asset within a period. Furnished holiday lettings are a business asset/trade for rollover relief purposes provided the income tax conditions are met. 

The new asset must be used within a business although the rules are relaxed slightly when capital expenditure is first incurred for the purposes of enhancing it and begins shortly after acquisition. The asset must subsequently be used within a trade and is not used for non-trading purposes at any time. 

A claim must be made within 4 years after the end of the later of the tax year of:

• The disposal of the old assets
• The acquisition of the new assets

Rollover relief is also available when an individual owns an asset personally, but the asset is used by his personal company in its trade, however both the old and the new asset must be used by the same company. 

Entrepreneurs Relief

If gift relief or rollover relief are not available, entrepreneurs’ relief is available for the disposal of qualifying assets. Gains on qualifying assets attract CGT at an effective rate of 10 per cent up to the lifetime limit in force at the time the gain is realised (currently £10m). 

Company Buyback

It is possible for a company to buy back shares when the company law requirements are met. Capital treatment on a share buyback can only apply to unquoted trading companies or unquoted holding companies of trading groups. The first two conditions to consider from a tax perspective are: 

• Is the buyback wholly or mainly for the benefit of the trade?
• Is the purpose to avoid tax?

A purpose that is generally regarded for the benefitting the trade is buying one shareholder out because they no longer wish to be in the business or because their relationship with other shareholder/directors is not positive. There are then four conditions that need to be met. 

A company buyback may be an appropriate way to facilitate the exit from a business of one of the shareholders and is commonly considered and used in divorce or dissolution proceedings. If the criteria is met for capital treatment, it is possible that the seller would be entitled to entrepreneurs’ relief for CGT purposes. If there were simply a transfer of the shares between the spouses in the year of separation, the disposal would be exempt. 

Divorce Implications For Inheritance Tax

The spousal exemption from IHT is available on any transfer between spouses or civil partners made on the breakdown of a marriage if made before the decree absolute or final dissolution order.

Transfers made after the decree absolute or final dissolution order are either potentially exempt transfers or not ‘transfers of value’ for IHT purposes. There is not a transfer of value if it was not intended to confer any gratuitous benefit on any other person and it was made at arm’s length between unconnected persons.

Divorce Implications For Pensions 

Advice in relation to pensions is regulated and needs to be sought form a financial adviser. 

The options in relation to pensions on divorce include:

1. An agreement met by the parties to divorce or dissolution.
2. Pension offsetting, which considers both party’s pension arrangements and looks to offset benefit or equalise benefit through other assets.
3. Pension earmarking or an attachment order, which looks to provide an entitlement to the pension capital and income when it becomes available. This option is now a less likely route because of the other options available provide separation and independence between the parties.
4. Pension sharing, which is where the value of the pension is shared with the other party and they can hold those funds in a separate pension.

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