Sarah Anticoni, a partner in the family team at Charles Russell, explains the need for a mature, considered approach to divorce when it comes to tax implications.

Sarah Anticoni, a partner in the family team at Charles Russell, explains the need for a mature, considered approach to divorce when it comes to tax implications.

It was reported from a small town in China in March 2013 that a record 53 couples on a single day rushed to divorce to allow them to split ownership of their property and dispose of them thus avoiding any capital gains tax . No such rush would be countenanced in England, divorce taking a few months to complete at its fastest, as there no such tax advantages . Whilst divorce rates remain high compared with the rest of Europe, marital breakdown more often triggers an equal division of capital assets and multiple strains upon income together with the loss of some tax saving opportunities.  Despite prudent financial planning over a lifetime, divorce is unexpected and sets in motion the reviewing of all the family’s fortunes worldwide including trust structures, wills and pre- and post-marital agreements.

Many couples have no appetite for addressing anything beyond the emotional fallout .They may lose sight of the real benefits to the family as a whole that can be achieved if a co-ordinated separation with clear time lines and tax elections is put in place. Early and accurate fact finding is necessary.  Where are parties resident and domiciled for tax purposes? Tax advice in all countries in which assets are situated should be taken without delay. Most tax regimes run to a calendar year, England being an exception. 

It takes some time for both parties to know what there is in the financial pot. It may take a bit longer, even with legal and financial advice, to identify and explore the range of possible financial outcomes. In legal terms there is no one right solution .Instead there is a range of possible blends of division of capital and income which can be tailor made for each family. If possible values of assets and possible tax computations should be made and agreed between advisors or the couple. Assets are valued at just before negotiations commence rather than at the date of separation. As English courts tend to use net figures for calculations assuming that at some stage (if not upon separation or divorce, but possibly upon a later trigger event) there will be disposals and the incidence of some tax. The practical challenge of encouraging separating spouses can often be bridged by mediation and focussing on the Chancellor as the common enemy.

Further complications

Income tax planning is extremely limited at this time, while maintenance is largely outside the tax regime as it is paid out of taxed income and received net of  tax.  From April 2013 it is important that both parties liaise as to elections as to who, if any, is to receive Child Benefit and how it is dealt with in tax returns.  Whilst rare it may be possible, for some, to claim child tax credits. Income, including earning capacity, really needs to be maximised.

Rather than moving immediately into a “doing” phase, rushing into short-term disposals of assets and realigning finances for what will be the “new normal”, spouses should seek early advice and communicate openly and frankly with their spouse. Few disposals can be reviewed or unravelled  without incurring further professional fees or tax consequences.

There are some practical steps which can be taken to maximise the family’s assets.  These include reducing or eliminating Stamp Duty Land Tax with regards to any transfer of property pursuant to a court order or by agreement in contemplation of divorce. 

Whilst decisions as to when to separate are rarely dictated by fiscal decisions, there are clear capital gains tax benefits to separating early in the new financial year (6 April).This allows both parties plenty of time to consider whether or not the transfer of any assets including interests in business or property in that year might eliminate or reduce CGT.  This is because the tax year in which separation takes place, the couple continue to be treated as being married and transfers do not incur CGT.

Also, if one spouse leaves the matrimonial home and the other remains in it, any later disposal of the property  to the spouse or a third party and forms part of the financial settlement, the Principal Private Residence exemption can be used.  Whilst married there can only be one PPR, but once divorced  each party elect which property attracts PPR.

It may not be rocket science and the savings may be limited, but prudent financial planning should continue. With lenders demanding higher percentage deposits and mortgages available to fewer, any capital or income tax savings that can be made should be because upon decree absolute when the marriage is dissolved, both parties will re-enter the tax world of the singleton.