Tax On Divorce Settlement

Divorce Tax Settlement Guidance & Support

One question that many couples entering divorce proceedings may ask is: “do you pay tax on divorce settlements?”

The answer to that question is that it depends on your situation and what assets are going to be exchanged as part of the divorce settlement.

At Optimise Accountants, we offer specialist divorce tax guidance and advice that helps couples and individuals navigate through all the tax implications that come with divorce. We also collaborate closely with family law solicitors, providing invaluable support to clients navigating the complexities of divorce settlements.

Discover the peace of mind that comes with our tailored financial solutions, ensuring a smoother path to your financial goals. With Optimise Accountants by your side, you can expect expert guidance and a commitment to protecting your financial future, no matter your unique circumstances.

Divorce and tax

Capital Gains Tax during a divorce settlement

Many types of assets are subject to Capital Gains Tax if sold to your spouse or a third party. Timing is critical to avoid paying tax that can be avoided during the divorce settlement

Stamp Duty Land Tax during a divorce settlement

Stamp Duty Land Tax (SDLT) is a property purchase tax. There is also a 3% SDLT higher rate that may be a large sun of money that can be avoided during a divorce settlement.

Income Tax

Getting a divorce and income tax is not something most people will think about. However, a transfer of certain assets could trigger an income tax liability without you knowing it.

Divorce tax implications

Navigating the financial ramifications of divorce brings its own set of complexities, one of which is understanding divorce tax implications. There are critical tax considerations that arise during divorce proceedings, such as:

Capital Gains Tax during a divorce settlement

Many types of assets are subject to Capital Gains Tax if sold to your spouse or a third party. Timing is critical to avoid paying tax that can be avoided during the divorce settlement.

If you’re married or in a civil partnership and living together during a tax year, assets transferred between you and your partner are considered ‘no gain no loss’, meaning no taxable gains are incurred. However, once you separate, you become connected persons for Capital Gains Tax (CGT) purposes.

Asset transfers are valued at market rates, which potentially results in a CGT liability for the transferor.

Since April 6, 2023, separating spouses and civil partners have up to three tax years after separation to make ‘no gain no loss’ transfers, granting ample time for careful planning.

Stamp Duty Land Tax during a divorce settlement

Another type of divorce tax implication that is critical to understand is Stamp Duty Land Tax (SDLT). This is a property purchase tax, although there are a number of Stamp Duty Land Tax divorce exemptions. 

For instance, when a house or flat is transferred between spouses or civil partners during divorce or separation, it qualifies for Stamp Duty (SDLT) exemption. This is provided the transfer is executed in accordance with a court order or an agreement related to the dissolution of their marriage or a separation order.

It’s important to note that for married couples, the 3% SDLT surcharge comes into play when both spouses intend to buy a house, excluding their shared matrimonial home. In such cases, at least one of the purchases will be subject to the 3% surcharge. For SDLT purposes, each spouse is considered to own any dwellings owned by the other spouse.

Income Tax

Divorce itself typically does not directly affect an individual’s tax position, as married couples are taxed independently. However, it’s crucial to carefully consider the income tax implications when transferring income-generating assets as part of the divorce settlement.

Maintenance payments received by the recipient are generally not taxable in the UK tax system, but they are also not eligible for tax relief for the payer.

The tax consequences related to divorce can vary widely and depend on the timing of asset transfers. To ensure a tax-efficient transfer and prevent unexpected tax liabilities, it’s advisable to seek professional advice from our expert tax advisors early in the divorce process.

How to avoid Capital Gains Tax when getting a divorce.

Certain assets will attract Capital Gains Tax and investments that will not. It is essential to understand asset classes and what Capital Gains Tax liabilities may exist.

Capital Gains Tax may be mitigated if assets are transferred before the spouse leaves home or the final settlement of divorce takes place.

Our team of expert divorce tax advisors is here to assist you with Capital Gains Tax planning and mitigation during the process of divorce. After our team collaborates with you to identify the assets involved in your divorce settlement, they will guide you in understanding the potential reduction in Capital Gains Tax achievable through our specialist solutions.

How to navigate Stamp Duty Land Tax in divorce settlements

There are many Stamp Duty Land Tax exemptions available during a divorce settlement. Stamp Duty Land Tax is not something that a couple think about when ending their marriage. There are far more critical things to consider.

That said, tax is a burden that can add fuel to an already emotional event. That is why you must understand what assets are being transferred during a divorce settlement and purchased once the divorce is finalised. We must not forget the 3% higher Stamp Duty Land Tax rate that may also apply in certain circumstances.

Property transfers during divorce, annulment, judicial separation, or separation orders can qualify for SDLT exemption. This exemption applies when the transfer is mandated by a court order or when a formal written agreement, signed by both parties, relates directly to or is in contemplation of a court order.

When buying out an ex-spouse or gifting your share in the main home, SDLT need not be a concern if these transactions align with the specified terms. Conversely, when selling the marital property to a third-party purchaser post-divorce, standard SDLT rates apply. 

If the property was your primary residence, you might qualify for the main residence replacement exemption by purchasing a replacement property within three years, provided your ex-spouse hasn’t already claimed it.

Stamp duty Land Tax may not need to be paid during divorce, but it may need to be paid on buying future homes or buy to let property investments. This tax may be mitigated with some effective tax planning with one of our divorce tax accountants working alongside your family law solicitor.

How our divorce tax advisors can help you

It is one thing to be informed about tax. It is another to be tax-efficient, legally compliant and get the result that both parties want.

We work with couples together or individuals. We also work with family law solicitors that are helping their clients during a divorce settlement.

Contact our divorce tax accountants and tax advisors

Book a tax call with our qualified divorce tax advisors

Book a tax call with our divorce tax advisors. Prior to the call, provide us with comprehensive details about your plans and list any specific questions you'd like us to address. Our tax consultations are recorded so that you can listen back at any time. Our tax consultations are recorded so that you can listen back at any time.

Divorce tax plan and calculations

Following the call, our divorce tax advisors will document the recommended asset transfers between spouses and thoroughly assess the associated tax liabilities for potential reduction or mitigation. The completion of these reports typically requires around two days to finalise.

Email support

We provide aftercare email support once the divorce tax report has been issued. We ensure that our email answers are sent to you within two working days.