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The Tax Doctor: How to avoid the tax headaches of divorce
by Matthew Brown on Dec 18, 2012 at 10:12
Divorce can cause several future tax headaches, including the potential loss of tax credits, CGT and IHT liability, but speedy treatment can help reduce the damage, writes the Chartered Institute of Taxation's Matthew Brown.
David has recently separated from Sam and will be divorcing her. David works full time but Sam only works part time. They have been married for 20 years and have two teenage children and a younger child, who will live with their mother.
They have a house with a mortgage, which is jointly owned, and some cash savings and shares, mostly in Sam’s name for tax reasons. David has moved out of the family home. He is currently living in rented accommodation, but he is thinking about buying a property with his new partner.
Sam wants to stay in the house with the children at least until they are adults, but David would prefer a clean break. However, the cash and other savings are not likely to be sufficient for Sam to buy out David’s interest in the house and it is unlikely Sam could get a mortgage on her own. David is paying child maintenance to Sam under an informal arrangement and he is continuing to pay the mortgage.
What advice can be given to David (and Sam) on the tax liabilities that might arise when couples divorce?
David has a number of problems that could have long-term effects on everyone concerned.
Take the effect of separation on tax credits. Up to separation, David and Sam were assessed as joint claimants. Their separation is a change of circumstance that should be notified to HM Revenue & Customs (HMRC) within one month of separation. Thereafter, Sam will be a single claimant. This is likely to make a material difference to her entitlement and, since increased entitlement will only be backdated one month, the earlier Sam notifies HMRC the better.
Next, capital gains tax (CGT). For the tax year of separation, transfers of assets between spouses are exempt as they take place on a no gain/no loss basis. Until the decree absolute (the certificate dissolving a marriage) is made, transfers are at market value, meaning a CGT liability may arise. The inheritance tax (IHT) for transfers between spouses continues until they are actually divorced.
If Sam wants to acquire David’s interest in the family home, but will be transferring all the other assets to David, it may be desirable to transfer the stocks and shares sooner rather than later.
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