Tax and Divorce
Tax is not normally a key consideration when a couple is contemplating divorce. However, Family Law Solicitors recommend you take expert legal advice before deciding to separate or agree on the financial settlement or finalise the wording of the financial court order.
Taking specialist legal and accountancy advice at the right stage can save thousands in tax. Get the timing of the sale or transfer of assets or the wording of a financial court order wrong and the asset transaction or court order wrong and it can create a tax liability in circumstances where with legal and accountancy advice tax would not have been payable.
In this blog, our Family Law Solicitors look at the impact of tax and divorce.
Online and London Family Law Solicitors
For family law legal advice call the expert London family lawyers at OTS Solicitors on 0203 959 9123 or complete our online enquiry form.
Our lawyers speak Arabic, Armenian, Farsi, French/Mauritian Creole, Spanish, Tamil Tagalog/Ilonggo, Urdu/Punjabi.
Tax and divorce
It’s essential to understand tax and divorce. If you structure your divorce financial settlement in a certain way you could end up paying tax that could have been legitimately avoided with the help of a financial advisor, accountant or specialist Family Law Solicitor.
Even if the tax cannot be avoided it needs to be factored into the divorce financial settlement as a 50/50 deal isn’t fair if you are the one who is going to have a massive tax liability when you come to sell your company or shares whilst your spouse who retained the family home has no tax liability on the sale of the home as the property is classed as their principal private residence. Equally, if your spouse says the value of their shareholding in the family business needs to be discounted by £200,000 to factor in their tax liability on the sale or transfer of the shares you need advisors and Family Lawyers who can tell you if their figure of £200,000 is grossly overinflated. For example, because your spouse has not mentioned allowances and exceptions they can claim to reduce their tax bill.
What Family Law Solicitors won't be suggesting is tax schemes but instead, they will focus on the importance of your understanding of how tax works so you can achieve a fair financial settlement.
If you are part of an international family your separation may involve taking legal advice and getting accountancy help from overseas to ensure that any overseas tax liabilities are taken into account.
Finally, you may be in the unfortunate position of being investigated by HMRC for tax avoidance if you were sold a scheme that was meant to be efficient tax planning but ended up a tax nightmare. At the time of your separation or divorce, you may not know how the courts will treat the tax scheme and the extent of your tax liability. Equally, your spouse may not want to settle their divorce financial settlement on the basis that you have potential tax debts of circa £2M when the court might eventually determine that the scheme you bought into was legitimate tax planning and not tax avoidance.
Tax rules and divorce
Some spouses worry unnecessarily about taxes and divorce. The person getting a lump sum payment under a separation agreement or financial court order does not have to pay tax on the lump sum received under the divorce settlement.
The transfer of property between two spouses or civil partners can trigger a tax liability in limited circumstances. Generally, an asset can be transferred between spouses or civil partners without tax falling immediately due if the transfer is made:
- Within three years of the end of the tax year of separation or
- Before the final divorce order or
- As part of the financial court order
The rules on the transfer of assets between spouses don’t mean that tax won't be payable on the eventual sale of the asset. For example, the transfer of shares in a family business from the wife to the husband may not generate an immediate charge to tax but may do so on the eventual sale of the company to a third party because there has been a capital gain. The immediate and future net effect of asset transfers and disposal must be considered to ensure you don’t lose out.
There have been some court cases where a spouse has tried to re-open a financial court order and renegotiate the financial settlement because of unexpected tax consequences. Generally, the court will say that unless there was fraud or dishonest financial disclosure the court cannot go behind the financial court order as future tax liabilities are reasonably foreseeable.
Spousal maintenance and tax
Some spouses who receive spousal maintenance payments from their former husband or ex-wife worry that the spousal maintenance may be taxable income and that, after payment of income tax, the spousal maintenance payments will not be enough to meet their reasonable needs.
In the UK, spousal maintenance is not treated by HMRC as taxable income. The rationale behind the HMRC treatment of spousal maintenance is that the person who is paying spousal maintenance is taxed on their income. If the spousal maintenance was also taxed as income in the hands of the recipient of the maintenance payment, then the same income would be the subject of double tax.
In the situation where a husband and wife are both employed in a family business, the earned income of both spouses will be taxed by HMRC. However, if the financially stronger spouse is ordered to pay spousal maintenance from his or her higher salary the spouse receiving the spousal maintenance payments will not have to pay tax on the maintenance.
Tax and child support
The same principles apply to tax and child support as to tax and spousal maintenance. That means that as the parent who is paying the child support was taxed on their income the parent receiving the child support does not have to pay income tax on the child support payment.
International tax and divorce
If a husband or wife is not a British citizen or the couple has non-UK assets, the treatment of tax and divorce can get even more complicated. That is why it is essential where there are international aspects that a husband and wife take expert legal and accountancy advice from London Divorce Solicitors and accountants.
How the Divorce Lawyers at OTS Solicitors can help you
Getting divorced involves an element of planning and strategy, especially if you or your partner is a high-net-worth individual or entrepreneur, you own shares in a family company, one of you has international connections and assets, you co-own property with a third party, such as a parent, or you have complicated assets such as share options or SIPP pensions.
In any of these scenarios, tax questions may need to be answered by your professional advisors. Our Family Law Solicitors can work in conjunction with accountants and financial advisors and advise you on:
- Tax and the family home – for example, mesher orders
- Tax and the family business and the implications of selling or transferring shares
- Spouses who own buy-to-let property portfolios as individuals, in a partnership, or within a company
- Pensions and tax-efficient pension sharing orders and pension withdrawal
- Inheritance tax gifting by parents and family to help a husband or wife get back on the property ladder after a separation or divorce
- Non-dom and immigration status issues and the tax implications
- ISAs and the inability to transfer them to a spouse on separation or divorce
Our experts are happy to advise on all aspects of your divorce and financial settlement.
Online and London Family Law Solicitors
For family law legal advice call the expert London family lawyers at OTS Solicitors on 0203 959 9123 or complete our online enquiry form.
Our lawyers speak Arabic, Armenian, Farsi, French/Mauritian Creole, Spanish, Tamil Tagalog/Ilonggo, Urdu/Punjabi.
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