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How to cut your divorce tax bill

So the difficult decision has finally been made. Your marriage isn’t working and the only sensible decision is to cut your losses, get divorced and move on. You may feel sad, regretful, optimistic, relieved – there are many possibilities. There is no right or wrong way to feel at such a major turning point.

But here is the bottom line: you will have years, effectively the rest of your life, to work out your feelings and resolve your emotions about the failed marriage. Your first priority should be the practicalities: who is going to live where, who is going to get what, whether you are able to resolve matters amicably or you will have to go to court. The decisions you make and the actions you take now could have a major impact on your life for decades to come, especially if you are the financially dependent partner.

Seek legal advice if you possibly can. It is the best way to protect your interests and you may be surprised by what you discover in a meeting with a competent family solicitor. Did you know, for example, that the date on which you formally separate from your partner can have a significant effect on the amount of tax you pay?

We are talking specifically here of capital gains tax, that welcome slice taken from profits made when you sell assets that have increased in value. Capital gains tax does not apply to the couple’s principal home, notably, but better-off divorcing couples may own a holiday home, for example, or may investments, shares or valuable items that need to be divided.

Many divorcing couples simply accept the idea that such sales will mean a chunk of value going to the tax man. But that is not necessarily the case.

As I note in today’s edition of the Telegraph, asset transactions between married couples are exempt from capital gains tax. Strictly speaking, they are treated as involving no gain or loss, because a married couple is regarded as a single unit for tax purposes.

Naturally, this exemption comes to an end if the couple split up. But the key is when this exemption ends. It does not end when the couple divorce as you might expect. In fact the exemption expires at the end of the tax year in which the couple separate.

For example, asset transfers between a couple who separate in August this year will remain exempt from capital gains tax until April 5 2016. The same date, however, would apply to a couple who separate in March 2016, but in the former case the couple have eight months in which to settle their financial affairs, in the latter case only one. From a tax point of view therefore, the optimal date on which to separate is April 6, at the very beginning of the new tax year.

If a separating couple can agree on who receives what, complete the necessary sales and move the marital assets around to their mutual satisfaction before the start of the new tax year, they can save a quite a sum that would otherwise go to the taxman. Depending on the assets in question, the saving could run into many thousands.

Eventually, of course, the assets in question will be subject to capital gains tax – when whichever party ended up in possession of a particular asset following the year of separation decides to sell or transfer it, even if they decide to sell or transfer it to their estranged or former spouse. In some circumstances, the latter scenario can lead to an uncomfortable situation in which one party has received no net gain but still has to pay capital gains tax. For example, a couple who are still sorting out their financial affairs beyond their tax year of separation may transfer the husband’s half ownership of a holiday home worth £50,000 to the wife. From a tax point of view, she has gained £25,000 and will have to pay capital gains tax on that sum, even though she is in reality no better off than she was before the couple separated.

As I told the Telegraph, separation at the end of a tax year can have potentially damaging financial consequences due to the lack of time available to consider and implement transfers.

The importance of sound financial and legal advice could not be clearer.

Read the Telegraph article here.

The founder of Stowe Family Law, Marilyn Stowe is one of Britain’s best known family law solicitors and divorce lawyers. She retired from Stowe Family Law in 2017.

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