Property and divorce is a complex issue. Due to the complexities, tax aspects particularly capital gains and inheritance tax, are often neglected. This article deals with the specific tax implications that may occur when going through a divorce or formal separation.
Capital gains tax
Transfers between husband and wife are exempt from capital gains tax. However, the inter-spousal exemption ceases at the end of the tax year following permanent separation, not on divorce. Therefore, although not practical for most couples, it is best to divide and transfer property before 5th April (the end of the tax year following separation) as this can maximise tax savings and allows more time to organise further financial arrangements.
The family home should be exempt from capital gains tax on transfer if it has been the couple’s main residence throughout the entire period of ownership. This is due to the Principal Private Residence Relief. Such relief can be extended in certain circumstances if the family home has not always been the main residence. For example, the last 9 months of ownership are always tax free if the house has been the couple’s main residence at some stage.
The Principle Private Residence Relief can be further extended by “special relief” which can either reduce or eliminate the tax bill on transferring the family home on divorce however, this is subject to certain criteria. In addition, “mesher” orders (effectively an order for deferred sale) can be considered where minor children are involved this allows one party wants to stay in the home and the other party retains an interest in the property rather than lose their interest in the long-term equity growth.
Inheritance tax (IHT)
This is another important area to consider. IHT transfers between spouses are exempt right up until the final annulment of the marriage or civil partnership. In addition, transfers made on divorce, or for the maintenance of the family, are exempt from inheritance tax.
As with all tax planning, we recommend you take professional advice as soon as possible.
If you require further advice in this area, please contact me on 01993 776593 or email me at Adrian.email@example.com to discuss how we can assist you.