Tax Implications Of Separation And Divorce

When a marriage or civil partnership breaks down the last thing on your mind is the effect that the break-up might have on your relationship with the tax man. The tax implications of separation can bring its own problems to an already frustrating set of economic circumstances if not considered from the outset.

Treatment of tax to be paid on divorce

When a married couple separate, the first step is to establish what matrimonial property they have acquired either separately or jointly during the marriage. Matrimonial property is all property acquired during the marriage, except any gifts or inheritance which have remained in their original form. The value of the family home bought before the marriage is also included in this calculation. From any matrimonial assets are deducted any liabilities which have accrued during the marriage to establish the net value of the matrimonial property available to divide.

Although tax is a liability, the generally held view is that tax which hasn't yet been assessed or billed will not be deductible from the overall value of matrimonial property. The treatment of a potential tax bill was considered in a family law case in 2004 in which a speculative or hypothetical tax bill was not viewed as something which should be deducted from the overall value of matrimonial property.

However, the liability of a large tax bill will undoubtedly have a knock-on effect to the tax-payer's resources and it is at that stage that a payment of tax may be accounted for as part of the three stage exercise of considering the matrimonial property: (1) establishing the matrimonial property; (2) deciding how the matrimonial property should be divided; and (3) considering whether the amount calculated to divide the matrimonial property is reasonable having regard to the resources of both parties. This includes their financial resources now and the resources they might have in the future.

More recent family law cases which have considered the treatment of tax highlight that the Court will look at the particular tax circumstances in mind. In other words, each case will be decided depending on the circumstances.

Tax paid on transferring assets between separating spouses

Capital Gains Tax ("CGT") is a tax which arises when you make a profit or gain on an asset which you sell or give away. You have an annual tax-free allowance for CGT which will soon increase from £10,900 to £11,000. In other words if your overall gains or profits from the...