View the article online at http://citywire.co.uk/money/article/a871479
Faulty forms could land divorcing couples with tax bill
A software glitch meant divorce forms calculated couples' assets incorrectly.
Divorcing couples may face a tax bill or find they have overpaid HM Revenue & Customs (HMRC) due to an error in the forms provided by the Ministry of Justice (MoJ).
Couples who are splitting fill out a financial statement, known as ‘Form E’, that details their financial assets (what they own) and liabilities (what they owe) as well as the financial needs of each party and any children.
The form totals the value of assets held and helps couples decide how to split these assets in a fair way. The problem centres around a small, but crucial, miscalculation; total assets are worked out as assets minus liabilities but a problem with the online form means the liabilities were not taken into account.
George Bull, a tax expert at RSM Baker Tilly, said the software problem means couples who have sold assets in order to split them where income tax or capital gains tax (CGT) is due may have overpaid or underpaid tax.
‘Somewhere in the software, the liabilities relevant to divorcing couples were not calculated and the effect is that assets may be overstated,’ he said. ‘Even if the figures were input correctly and it looks like they were dealt with correctly, the liabilities were not taken off.’
For example, a couple has a second home worth £250,000 but there is a mortgage of £100,000 outstanding, meaning the total value is £150,000 – the form will calculate the asset at £250,000.
The people who are most affected will be those who are doing a ‘DIY divorce’ and using the form to split their assets without using solicitors, said Bull. Solicitors typically use their own software to calculate assets and liabilities and should have spotted the discrepancy if they do use Form E.
The MoJ has said the majority of couples would not be affected but for those who are, there could be serious tax implications.
Spouses can transfer assets to one another without giving rise to CGT but once a couple separates, not divorces, they only have a year to transfer assets CGT-free. When transfers are made after, CGT may be payable (everyone has a CGT allowance of £11,100).
Bull said those divorcing before 5 April 2015 have until 31 January 2016 to submit tax returns detailing any gains.
‘Many of those affected [by the MoJ software glitch) won’t yet have finalised their returns and paid the tax,’ he said. ‘They may now have to do so on a provisional basis [as they will not know the revised amount].
‘If they have already paid their tax they will have to consider whether they can amend their return and claim a repayment.’
Bull added that some people may have to revisit the divorce settlement through the courts and that ‘might put some people off’.
There could also be inheritance tax (IHT) implications if one spouse has died since the divorce.
Unlike CGT, even separated spouses can use the inter-spouse IHT exemption and it is only lost when the decree nisi - a court order stating the date at which the marriage will end - comes through. After this point, transfers for the maintenance of the former spouse and children are still exempt for IHT purposes.
‘Unless one of the parties has subsequently died, it is unlikely that any IHT return will have been submitted in connection with the divorce settlement,’ Bull said. ‘Amendments to records of values transferred can therefore be made when the revisited values are known.’
The MoJ has not confirmed what action it will take to help couples who have been affected by the problem and there has been no offer of financial compensation should a couple have to go back through the courts.
There are rumours that the MoJ knew about the error but failed to act in time, something it refused to comment on.
Bull said the error flagged a ‘broader issue’ for a government moving all its departments online.
‘The government is moving to digital by default…so all citizens dealing with it – for tax benefits, passports, work permits – will be dealt with online and there is an enormous responsibility in the government departments collaborating and getting it right,’ he said.
‘This is a disaster for couples who made a clean break and may now have to go back to court; who will pay for that?’
A spokeswoman for the MoJ said: ‘We are urgently investigating this issue. Officials are taking steps to identify rapidly cases where this regrettable error may have had an impact, and we will be writing to anyone affected as soon as possible.
‘Anyone concerned about their own court proceedings should contact formE@hmcts.gsi.gov.uk. The form now online no longer contains the error.’
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