Whilst Christmas may feel like a distant memory, it can be a stressful time for many people and it is sadly true that more couples find themselves contemplating divorce or separation in the New Year. We discuss in this article five areas of law and tax that you may wish to consider on separation.
The tax and legal aspects for a divorce or dissolution of a civil partnership are essentially the same. Unmarried couples will have different issues and much less legal protection/intervention and this article is not able to cover their issues.
Tax issues: The main tax to consider in divorce is Capital Gains Tax (CGT). This will be relevant if the couple have assets such as their home, other property or business assets they want to transfer between them or need to sell to realise cash.
Married couples are allowed to transfer assets between them without gains or losses and this relief is still available up until the end of the tax year in which they have separated. After that, any assets transferred between the 6 April and the divorce itself are deemed to occur at market value.You may need advice on potential tax costs and to identify if various reliefs such as Private Residence Relief for your home or Entrepreneurs Relief or Gift Relief for business assets will apply.
Tax credits: You must report a change in circumstances such as one party moving out to HMRC within 30 days and start separate claims. This includes separations under a court order or separations which are likely to become permanent.
Update your will: After divorce or dissolution it is a good idea to review your will. Gifts to former spouses and executorships will be invalid after divorce so you might want to include new gifts and appoint new executors. It’s worth checking the Inheritance Tax (IHT) position too as a single person will have only one nil rate band and will pay IHT if their assets exceed £325,000. A married couple y contrast can effectively pool their exemptions to have £650,000 in assets before IHT is an issue.
Go Collaborative: Historically divorce has always been perceived as a sparring match between the two parties. These days there are a number of less confrontational options which are intended to allow couples to reach agreement on a settlement between them without resorting to the costs and unpleasantness of court.
One option is a collaborative divorce. Here each party appoints a specially trained collaborative lawyer to advise them, and everyone sits down together a four way meetings to work things out face to face at their own pace. The aim is to work constructively so that relationships do not become toxic in the longer term.
Protecting family assets: One of the most frequent questions asked by parents looking at gifting assets down the generations is how best to protect assets in the event of a child’s divorce. Parents are naturally concerned about preserving family wealth in the family.
Trusts can be helpful in these situations but using a trust is not an absolute cast-iron guarantee that assets will be completely protected in the event of divorce. The courts powers vary with the nature of the trust and can be very wide-ranging.It is certainly an area to take legal advice and the trustees may find themselves needing to get involved in the proceedings. A trust set up by parents could well be a financial resource for the child and will need to be disclosed and taken into consideration in any divorce proceedings.
