Divorce: till the new tax year do us part

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MIKE FLEMING, tax director of Straughans Chartered Accountants, takes a look at the issue of divorce – with the key trigger of the Christmas period coming up.


WHILE families across the country prepare for the traditional festivities of Christmas, there will be some couples who, despite their best efforts, feel that separation in 2013 is the only way forward.

Divorce patterns generally show a spike in January, when the pressures of one family Christmas too far and the natural turning point of the new year drive people to file for divorce. But there are cogent tax reasons - not least in terms of the division of property assets - why people should in fact be waiting until the new tax year in April to go their separate ways.

Due to the way the tax year is organised, couples who separate in January could be liable to higher tax bills than those who prepare for separation but do not announce it until April. A couple who separated in January and then began the business of transferring property from one spouse to the other would not be eligible to take advantage of the exemption from Capital Gains Tax (CGT) which normally applies to married couples.

This is because any transfer of property between spouses after the end of the tax year in which they separated is not exempt from CGT. However, if a couple planned to split on or after 6th April, but - while still officially together - organised a transfer of property from one party to the other in that year, this would not be chargeable to CGT. While an extra three months may seem a long time to wait once the decision to separate has been made, it’s clearly worth bearing in mind the huge savings to be made in terms of CGT in taking the time to allocate your property assets as desired before heading down the path to divorce.

Obviously many couples may not want to simply allocate the family home or other property assets to one party in this way. There are many other ways of dividing property on divorce, all with their own tax implications.

Fortunately for the stability and protection of families, the rule regarding the non-exemption from CGT of property transfers between separating/divorcing couples is waived when the property in question is the family home. This is due to the fact that if the property can be classed as a ‘Principal Private Residence’ (PPR) – which usually requires the family to have lived there the majority of the time since the acquisition of the home – it is then not chargeable to CGT on transfer.

If a couple own a main property, which they would class as the ‘family home’ but have actually been living elsewhere for up to 36 months, they should still be eligible to the exemption from CGT as long as they can prove it has been their main home in the past.

It’s also possible to secure further extensions on PPR relief during divorce proceedings, which are usually conditional on the partner who has moved out agreeing not to claim a new property as a principal private residence, and relinquishing any financial interest in the family home to the spouse who continues to live there. This is obviously all dependent on the partner who was retained the family home continuing to live there.

While this sounds sensible, it can create an uncomfortable period of limbo for the partner who moves out. Retaining the family home as their official principal residence essentially discourages the purchase of a new home, as that would automatically become their PPR instead, which could leave them liable to capital gains tax on the sale of the family home. In the case of a ‘Mesher’ order being granted, which prevents the home being sold until an agreed point such as a child reaching a certain age, this limbo period can last years, unless the partner who moved out accepts the CGT implications and buys a new property regardless. Am I the only one in thinking that this is a bitter penalty to pay for graciously (or indeed ungraciously) offering to move out of the family home?

This ‘delayed penalty’ effect could be one reason why many divorcing couples opt to sell the family home. As the legal position on the division of assets on divorce is to split everything 50:50, this can often feel like the fairest and least complex way to do things. In reality couples often finally decide on a less even split, usually weighted in favour of the partner who will take on primary care of the children, but putting the family home on the market at least releases capital which then can be allocated as the couple – and their lawyers – see fit.

It is clear that the issues surrounding property and divorce are complex, especially when the implications for tax are taken into account. This is another reason why buying some time in waiting for the new tax year may not be a bad idea. Not only does this give a couple time to transfer any property or other assets tax-free before the 6th April, it also presents an opportunity to consider the other available options for the disposal or allocation of property on divorce. This could be one step towards ensuring that, while inevitably emotionally draining, the divorce need not be financially crippling too.

Mike Fleming is a tax Director at Straughans Chartered Accountants