UK Tax When Getting A Divorce

Simon Misiewicz

Expat & Property Tax Specialist

8th February 2022

Getting a divorce and UK tax considerations

You need to consider several elements of tax when getting a divorce from Capital Gains Tax and SDLT when transferring assets in a settlement.

Once a divorce settlement is agreed upon, you will have until the end of the financial year to complete those transfers without being taxed by HMRC.

What are the basics of getting a divorce and paying UK tax?

As property accountants serving thousands of UK landlords that purchase buy to let properties, we know that understanding UK tax when getting a divorce can be a confusing and complex subject for many.

The first thing to ascertain is that you are able and eligible to get a divorce.

As part of a divorce settlement, money transferred between parties is not taxable to the recipient and not deductible by the payer.

The family home often forms a significant part of the overall family wealth, but an immediate sale to realise capital may not be possible or practical.

It is crucial to consider the tax consequences when the property asset is later sold or transferred.

This is especially important if the transferring spouse or civil partner has already left the marital home following separation.

Gains arising on the disposal of an individual’s main residence are exempt from Capital Gains Tax (CGT), and the same applies for a divorcing couple where that property has been their principal residence during their period of property ownership.

If one spouse moves out of the marital home and buys or rents a new property, their principal residence may change.

In this case, tax relief will still be available for nine months after they move out, but the disposal or transfer taking place after the nine months could lead to a CGT charge.

The nine months can be extended if the property ownership is transferred to the occupying spouse as part of the divorce settlement. This is not the case if the departing spouse elects another property to be treated as their primary residence.

Transfers between spouses are exempt from Inheritance Tax (IHT), which continues throughout separation up until the Decree Absolute.

For couples where one of the spouses is not UK domiciled, the maximum that can be transferred from the UK domiciled spouse to the non-UK domiciled spouse is £325,000.

Transfers made after the Decree Absolute may not be classed as ‘transfers of value’ if they are made between the couple.

Transfers made following a court order, including the creation of settlements, are not usually ‘transfers of value’, so specific advice should be obtained beforehand.

Married couples are taxed independently of each other, so divorce should not have any particular impact on an individual’s Income Tax position.

Careful consideration will be required on the income tax consequences of any income-generating assets transferred as part of a divorce settlement.

Maintenance payments fall outside the UK tax system and are not taxable on the recipient. They are also not tax-deductible for the payer.

Ensuring that assets are transferred as tax-efficiently as possible is advisable to avoid tax liabilities.

How can I avoid Capital Gains Tax in divorce?

Capital Gains Tax (CGT) may be payable on the profit you make when selling or transferring an asset.

With a UK divorce, this is most likely a tax issue regarding property disposal, including:

– the family home

– a second home

– valuable assets such as jewellery and artwork

– shares in a Limited Company

Each individual has an annual CGT exemption, meaning they can make a certain amount of gains before paying any UK tax to HMRC.

Above this threshold, if you remain within the basic Income Tax band when the gain is added to your taxable income, you will pay 10% on your gains upon selling a commercial property or shares. This rate increases to a CGT liability of 18% on residential property.

If you are a higher or additional rate taxpayer, you pay a 20% tax on a commercial property or shares or 28% tax on residential property.

This could amount to a significant tax bill, so both parties need to try and mitigate any CGT liability during a UK divorce.

The disposal of the primary residence is not usually subject to CGT. If a UK divorce settlement involves the sale or transfer of the main home, then Principal Private Residence Relief may apply.

From April 2020, Principal Private Residence Relief applies the entire time you own the property as your primary residence, plus a further nine months after separation.

If it is not dealt with during the nine-month limit as part of a financial settlement, a tax liability could be due on the home if it has increased in value and is sold more than nine months later.

The tax liability could be up to 28% of the profit.

Another way to ensure no CGT is payable on divorce is to agree on transferring any assets in the tax year immediately following separation. This is before formal divorce proceedings commence.

Spouses and civil partners can transfer assets between each other with no tax liability under the ‘no gain/no loss’ principle.

Even if you have separated, this principle remains in place until the tax year following the separation.

You or your former spouse may hold shares in a family business or a Limited Company.

When you divorce, the shares in the Company may need to be valued as they could form part of the financial settlement.

If any shares are sold or transferred as part of your divorce settlement, there may also be a CGT liability.

The ‘no gain/no loss’ principle applies as long as the shares are disposed of within the tax year of separation.

It is recommended that spouses and civil partners read these details to reduce their Capital Gains Tax liability.

Do I pay stamp duty to transfer my property after a divorce?

Stamp duty exemption will apply as long as the home transfer is made under the court order granting the divorce.

On the sale of your property to a third party purchased after your divorce, they will pay stamp duty in the usual way.

Suppose you transfer property because of divorce, separation, or the end of a civil partnership. In that case, you do not pay SDLT if you transfer the interest in land or property to your partner as part of an agreement or court order because of a divorce. 

If you own two properties, transferring a house or flat between husband and wife or civil partners is exempt from SDLT under the above conditions.

The shares in one or both properties can be transferred to the other without paying stamp duty.

If you buy your spouse out of the main home and the purchase is made under a separation agreement or court order, then no stamp duty will arise.

What are the SDLT considerations when selling a property after a divorce?

On the sale of the marital property to your spouse, the stamp duty exemption will apply as long as the property transfer is made under the court order granting the divorce.

On the sale of your property to a third party purchased after your divorce, they will pay stamp duty in the usual way.

If the property was your only principal residence, you could qualify for the primary residence replacement exemption.

This applies as long as you buy a replacement within three years.

It is also dependent on your spouse has not already claimed the exemption.

If a couple agrees to separate permanently without getting a court order, they will be treated for SDLT purposes as an unmarried couple.

Each spouse can buy a house without being treated as owning any property the other spouse owns.

Transfers of property between them will also be exempt from stamp duty.

Does the sale of property in a divorce settlement get taxed?

Where the family home is to be sold and the proceeds divided between the spouses under a divorce settlement, any gain on the sale will be exempt from CGT. This Capital Gains Tax exemption applies to both parties.

This is as long as the sale takes place within nine months of the departing spouse leaving the family home.

If the departing spouse has elected for another property to be treated as their principal residence following departure, any gain relating to the period following the election will be taxable in the hands of the departing spouse.

In some instances, the departing spouse either owns the family home in their sole name or owns the house jointly with the occupying spouse and then transfers the home to the occupying spouse under the divorce settlement.

If so, the departing spouse can claim that the home should be treated as their primary residence from the date they left it until it is transferred to the remaining spouse.

Where this claim is made successfully, there will be no CGT charge on the transfer to the occupying spouse.

This claim cannot be made where the departing spouse has elected for another property to be treated as their principal residence.

The claim can only be made in cases where the departing spouse’s former interest in the family home is to be transferred to the occupying spouse rather than being sold and where the occupying spouse continues to live in the property as their principal residence.

Suppose the separating spouses own foreign assets such as a holiday home to be transferred as part of the divorce settlement. In that case, the impact of foreign currency movements on the capital gains position on the disposal needs to be considered.

In the same way, as for any other chargeable asset, the acquisition costs and value on disposal of a property will be calculated by reference to sterling at the relevant dates.

This can give rise to a situation whereby the property value has decreased in local currency terms but increased in sterling terms (or vice versa) due to movement in exchange rates.

There may also be local taxation issues to consider on the transfer of foreign property under a UK divorce settlement.

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