In this instalment of Stowe guests, we catch-up with Sofia Thomas from Sofia Thomas Limited.
A specialist tax consulting services to law firms, family offices and high net worth individuals, Sofia has worked in financial service for over a decade and has previously consulted for Google.
She joins us on the blog today to share her top tips for tax during a divorce or dissolution of a civil partnership.
During a divorce inevitably one of the key parts is the separating of finances. Whether you sell or transfer assets, there could be a tax charge. It is important to remember taxes can be payable even if there is no money exchanging hands.
Whilst there is no ‘divorce tax’ as such, there are many taxes which are likely to apply when going through a divorce: such as Capital Gains Tax, Stamp Duty and Income Tax.
Unforeseen tax implications can have two major impacts:
- Reduces the value of the assets and or settlements
- Unpaid taxes can result in penalties of up to 100% and possible HMRC enquiries. It is often not possible to reverse these consequences
Due to the financial impacts taxes can have on settlements it is wise for both parties to seek out tax advice from a qualified tax advisor or accountant
The best tax tip I can give to clients is to remember to make tax a part of the conversation during divorce proceedings. Ignoring tax implications can be detrimental to one or both parties and often irreversible.
The most common tax to pay during divorce is Capital Gains Tax which at a top rate of 28% is a large chunk of an asset. Being aware of the taxes and engaging an experienced tax advisor ensures that taxes are considered and mitigation planning is undertaken.
The intention is important when planning for taxes. If the financial settlement proposes that you will have a share of buy-to-let properties and the other party will retain the main home there will be different tax consequences when both of you come to sell your respective assets.
Currently, the main home can be sold with no tax but buy-to-let properties will incur a capital gains tax charge. Therefore, if your intention is to sell assets to support you in the future this must be given weight in the negotiations.
Location is another consideration for taxes. In a recent case, the ex-wife moved to Belgium after the divorce. Unfortunately, child maintenance payments are subject to tax at 41% in Belgium meaning that from an order of £1,600, the ex-wife was only receiving a little over £900. Had this been considered before the final divorce, financial provisions for the child could have been structured in a different way.
Change of ownership
It’s likely that as a result of the divorce the assets you own may change and you may receive income-generating assets – such as shares or rental properties. As a general rule, any untaxed income must be reported on your tax return. If you have not previously filed tax returns you will need to register with HMRC to do this.
Whilst there are no ‘divorce’ taxes, there are a couple of reliefs specifically available to reduce unintended tax consequences resulting from divorce.
There are several conditions which need to be met but they are worth discussing with your tax advisor. One is on the sale of the main home where relief may still apply even if you have not been living in the house.
The second is the waiving of the additional 3% stamp duty on the purchase of another home if you are still on the title deeds of the original matrimonial home.
Questions you should be asking
What will my net position be if I need to sell these assets after the divorce?
If I transfer this property to H/W will there be stamp duty or capital gains tax implications?
What is the tax treatment of this in the country I live in or intend to live in?
What are my tax obligations as a result of the proposed settlement?
And my final advice, remember to ACT
Aware – seek out knowledge and expertise, ask your solicitors and tax advisors the right questions
Compliant – HMRC is becoming increasingly harsh on individuals who fail to comply with their tax obligations
Transparent, timely, targeted – sharing your future plans as early as possible helps to ensure the most efficient and targeted tax planning.
You can find out more about Sofia Thomas Limited by visiting the website here.