In this instalment of Stowe guests, we catch-up again 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 answers to some of the most common question she receives from clients regarding divorce and tax.
In my last guest blog for Stowe Family Law I shared some top tax tips to consider when getting divorced. In this piece I thought it might be helpful to pull together a list of the most common questions client’s ask me.
Do I need to consider tax on my divorce?
The big money questions! I have pulled together a high-level flow chart for Stowe blog readers to provide some guidance on this question. Clearly, it’s not possible to cover all eventualities, however, I have considered the most common issues. In situations where there may be some tax implications I’ve included some questions which I hope will assist you in raising this with your solicitor or tax advisor.
Will my settlement be taxable in the UK?
No, divorce settlements are not taxable in the UK. This is the same for deferred settlements. If a deferred settlement is paid late and there is interest due on the late payment, the interest only may be taxable. For example if you divorce in 2020 and per the consent order your £200,000 settlement will paid to you by December 2021. There may be a clause in the consent order, that if not received by this date there will be interest due on the late payment at 3%.
Assuming you finally receive the settlement by June 2022 you would received £200,000 plus £3,000 in late payment interest. The £3,000 interest only will be assessed to tax.
What if my settlement is tied to the sale of an investment property we both own?
If you are the joint owner of a property which is going to be sold after the divorce and your settlement proceeds will be funded from this sale then there will be a potential tax liability. You will be taxed on your percentage of the gain. The capital gains tax rates for property in the UK are 18% (if you earn under £46,000) and 28% (if you earn over £46,000 or if the value of the gain would take your income to over £46,000).
Each individual in the UK has a capital gains tax annual allowance of £12,000 (for 2018-19) which reduces any taxable gain.
By way of simplified example if you sold a shared property for £500,000, if you owned 50% of the property you would need to report the portion of the gain which relates to your ownership of the property.
For example, see the simplified capital gains tax calculation below;
|Simple Capital Gains Tax Pro Forma|
|Less all costs|
– selling costs
– purchase costs
– improvements to the property
|Less Annual Allowance||(£12,000)|
|Capital Gains Tax Payable at 28%||£ 30,240|
This gain must be reported on a tax return and paid to HMRC. If your settlement is funded by the sale of a joint property after the divorce one option available to you, is to seek advice on the potential capital gains tax liability and then request an indemnity against this in the consent order.
We are selling our main home will there be capital gains tax to pay?
In the UK there is a relief called Principal Private Residence relief (PPR), this relief allows you sell your main home without paying tax on the gain if you meet certain conditions. The main conditions are
- You have lived in the property as your main home for the whole time you have owned it
There is an addition to this relief which allows the relief to continue for an additional 18 months after the you have left the home. Note that this 18-month extension may be reduced to 9 months from April 2020.
In simple terms if you have both lived in your house as your main home for the whole time you have owned it then principal private residence relief should be available to exempt the total gain, so that no tax is payable. If one spouse has moved out of the martial home but it is sold within 18 months from the date they moved out, again no tax should be payable.
If you have not lived in the home the whole time you have owned it or have multiple properties you should seek further advise. Additionally, if you have been absent from the home for over 18 months there are some reliefs which may be available to reduce any taxable gain but you should seek advice on this.
You can find out more about Sofia Thomas Limited by visiting the website here.