The tax issues of divorce explored by Laura Paul from the Family Law department at law firm Hill Dickinson

Dec 22 2009 By James Shepherd

Laura Paul

“Divorce… Don’t let it be too taxing,” says Laura Paul from the Family Law department at law firm Hill Dickinson...

There are numerous financial consequences of divorce, including many tax issues.

At this time of year, with the end of the tax year looming, consideration must be given to capital gains tax (CGT) and the need to obtain good, commercially driven legal advice in relation to matrimonial affairs, so that a settlement is reached as early as possible with tax liabilities kept to a minimum.

This article is not intended to offer detailed tax advice, but rather to highlight the potential CGT savings that could be achieved if a couple has separated in this tax year but has not yet reached a financial settlement.

For CGT purposes, it is separation rather than divorce that triggers a change in the tax treatment of an individual in the context of marriage breakdown.

The position is that in the year in which they separate, spouses may transfer assets between themselves without paying CGT, as transfers are deemed to take place at a value that would result in no gain or no loss being made.

However, it must be noted that CGT may be payable when that asset is eventually sold or transferred to a third party.

After the end of the tax year in which the couple separates, a transfer of assets between spouses may result in a CGT liability for the transferor. It is important to note, however, that a chargeable gain on the transfer of an asset that arises as a result of a court order may be “held over” until the asset is eventually sold.

The matrimonial home is usually the main asset in divorce proceedings, and will generally be exempt from CGT as it is the principal private residence.

However, consideration must be given to a situation where a couple owns more than one property, or a situation whereby a spouse vacates the property but retains an interest in it until a future specified event (such as the youngest child ceasing full time education). These are common circumstances and ones where a CGT liability may arise.