Tax implications of divorce

Divorce is a challenging and emotional process, and the financial implications can be complex. Among these number of considerations, understanding the tax implications is crucial.

Capital Gains Tax

When a couple divorces, the transfer of assets between them usually doesn’t incur Capital Gains Tax (CGT) if the transfers occur in the tax year of separation.

However, if the asset transfer happens in a subsequent tax year, CGT may be charged. This means if you’re transferring the family home or shares in a business to your ex-spouse after the tax year you separated, you might have to pay CGT on any increase in value.

Income Tax

Your marital status affects your Income Tax. Once you’re separated and living apart, you can’t claim the Married Couple’s Allowance.

However, if you’re receiving maintenance payments from your ex-spouse, these are not taxable.

On the other hand, if you’re the one making the payments, you can’t deduct them from your taxable income.

Inheritance Tax

Gifts between spouses or civil partners are usually exempt from Inheritance Tax (IHT). However, once you’re divorced, this exemption no longer applies.

If you make a gift to your ex-spouse and then die within seven years, the gift might be subject to IHT.

Pensions

Pensions can be a significant asset in a divorce. They can be split in several ways:

  • Pension sharing – You get a percentage of your ex-spouse’s pension. This is transferred into a pension in your name.
  • Pension offsetting – The value of the pension is offset against other assets. For example, one spouse might keep the pension, while the other gets the family home.
  • Pension earmarking – Some of the pension income is paid to the ex-spouse when the pension starts being drawn upon.

The tax treatment of pensions depends on how they’re split.

Property and the family home

The family home is often the most significant asset in a divorce. If you sell the home and split the proceeds, there’s usually no CGT to pay if it’s been your main residence.

However, if one spouse moves out and the home is sold later, they might have to pay CGT on their share of the increase in value since they moved out.

Child benefits

Only one parent can claim Child Benefit, even if you share custody. If both parents claim, HM Revenue & Customs (HMRC) will decide who gets the benefit.

It is worth noting that if the parent receiving the Child Benefit has an income over £50,000, they might have to pay the High Income Child Benefit Charge (HICBC).

The tax implications of divorce can be tricky to navigate, and everyone’s situation is unique. If you’d like further advice on the tax implications of a divorce, please get in touch.

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