How to make sure your tax affairs are in order before you divorce as applications jump after ‘no fault’ launch

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New divorce laws introduced in April have seen the number of applications nearly double as couples can now split without having to prove “fault”.

Nearly 13,000 applications for divorce were filed between April 2021 and April 2022, up from just over 6,760 in the previous year, according to the latest figures from the Law Society.

The “bulge” in applications comes as the new law allowing speedy “no fault” divorces came into effect in April.

Law Society vice-president Lubna Shuja said this was to be expected as couples take advantage of the new faster process.

She said: “By not having to prove a fault-based fact against their ex-partner, separating couples and their children will not have to suffer unnecessary conflict and anxiety.”

What are “no fault” divorces and why were they introduced?

Under the new law, couples can now get divorced without having to allege “fault” by the partner, such as adultery.

The new process is also quicker and mostly online – couples can get a “no fault” divorce within six months of first applying, even if one partner is opposed.

From the day the divorce application is filed, one has 28 days to notify their partner, by email by default, followed by a printed confirmation of the email by post.

Couples can also now file joint applications, while previously only one party could apply for divorce. In April, just over a fifth of applications, or around 2,770, were joint, according to the Law Society.

“No fault” divorce removes the need to put the whole responsibility for the marriage breakdown on to one partner, ending the blame game and allowing divorcing couples to focus on key practical decisions regarding their children, finances and the future.

It is expected to speed up the process, which until now was much longer – even if both parties agreed to divorce, they would have had to separate for at least two years to prove the split was serious.

Under no fault divorces, financial settlements will continue to be dealt with separately.

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How to make sure your tax affairs are in order before you divorce

Below, we outline five areas to consider when it comes to making sure your tax affairs are in order before you go ahead and split with your partner:

Capital Gains Tax (CGT) on divorce

Generally, any transfer of assets between two parties who are married or in a civil partnership will not be taxable as it is treated as taking place at a “no gain, no loss”.

However, Adam Bonell, partner at UK accountancy firm HW Fisher, notes that timing is extremely important when considering the transfer of assets between divorcing couples.

“The ‘no gain, no loss’ rule extends to the tax year of separation, but only if you lived together at some point in the tax year”, he explains.

“From the 6 April, following separation, while you still may be legally married or in a civil partnership, the ‘no gain, no loss’ rule will no longer be applied, however you will be deemed to be ‘connected persons’ for CGT purposes.

“This means that any transfer of assets will be deemed to take place at market value which may mean you are liable to pay CGT even though no cash has exchanged hands.”

Family home and ‘Principle Private Residence Relief’ (PPR)

It is important to consider the potential tax consequences when the family home is sold or transferred as part of a divorce.

Mr Bonell explains: “Principle Private Residence Relief may be available on the gain arising on disposal/transfer where the property is, or has at some point, been used as your only or main residence.

“If you are married or in a civil partnership, you cannot have more than one main residence between you for the purpose of this relief. After the tax year of separation, each spouse/civil partner will be entitled to nominate separate properties which they will consider their main residence for PPR purposes.

“PPR relief is always available for the last nine months before disposal/transfer if the property has been occupied as your main residence at some point during the period of ownership.”

Transfer of property to occupying spouse

In some cases, one of the partners leaves the family home and transfers their share of the property to the other, who will continue to live in the property.

“As PPR is always available for the last nine months of ownership, if such transfer is within nine months, no CGT will be payable”, Mr Bonell says.

However, he notes that a special extension to this rule may apply where the leaving partner transfers their interest in the property to the other spouse under the Court Order.

“In this situation, if the transferee has continued to occupy the property as their residence throughout the period since the transferor left, PPR relief will be extended from the date the transferor moved out until the date of transfer.

“Relief in this circumstance will not be available if the transferor has elected for another property to be their main residence. Furthermore, the claim can only be made if the property is being transferred and not sold.”

Transfer of business assets and “hold-over relief

Hold-over relief can be claimed when you give away business assets (including certain shares) or sell them for less than they’re worth to help the buyer.

So it means you do not pay capital gains tax when you give away these assets. However, the person who receives the assets will pay CGT when they sell them.

Mr Bonnell said: “This relief allows a capital gain to be held over against the base cost of the asset, reducing/eliminating the immediate charge to CGT. However, when the asset is eventually sold the CGT will be much higher, due to a lower base cost attributed.

“Care must be taken when considering the availability of hold-over Relief. HMRC’s view is that such transfers under a divorce are not a gift and consequently hold over relief will not apply.”

Inheritance Tax – divorce will not revoke an existing will

Transfers between spouses or civil partners are generally exempt from inheritance tax, under the “inter-spouse exemption”.

Mr Bonnell says this rule continues during the period of separation until the final order for divorce, known as “decree absolute” under the old law, is granted.

If one partner is non-UK domiciled, the interspousal exemption is limited to £325,000.

“Transfers which are made after the Decree Absolute, under the terms of the Court Order, may still be exempt from IHT provided there is no intention of conferring any gratuitous benefit on the recipient.

“Furthermore, maintenance payments made to a former spouse or civil partner should also be exempt from IHT.

“It is important to note that divorce does not revoke an existing will. We recommend that your will is reviewed following divorce and updated accordingly.”

Income tax – you may need to file a self-assessment tax return

Transfers between spouses or civil partners under a Court Order are not subject to Income Tax.

However, if you receive income producing assets from your former spouse such as shares or interest-bearing bank accounts, you will be subject to income tax on these amounts. You may need to file self-assessment tax returns if your income is above certain thresholds.

Mr Bonell adds: “The tax consequence of divorce can be material, with many pitfalls to navigate. With that in mind, it is important that specialist tax advice is sought as early as possible to ensure assets are distributed in the most tax-efficient way for both parties.”

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