Proposed Changes to tax in Divorce Settlements

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In the last week, the Government has announced several proposed changes to how tax applies in divorce settlements. The proposed changes are still in draft, and not expected to come into force until 2023, but they are seen as a positive step.

Tax is often the last thing on anyone’s mind when they are in the middle of a divorce, but it can be an extremely important consideration. Depending how the assets are distributed, tax can be a significant expense, and reduce what remains of the assets to be shared between the family. 

It is therefore always important to consider what tax might apply on any possible division of the assets, to make sure firstly that it is factored in and you don’t get a nasty surprise later on, receiving less than planned, and secondly to try to ensure that a settlement is structured in the most tax efficient way, to minimise what is lost in tax when assets are transferred.

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One of the biggest issues that arises is that currently, transfers are only exempt in the tax year of separation. That means if for example you separate in May, you have 11 months to agree and implement something to benefit from the exemption, but if negotiations or court proceedings take longer, you could find hefty charges apply. 

The situation is worse if you separate early in the year, with just weeks or even days before the tax year ends, as this rarely allows enough time to resolve matters before the exemption is lost. The proposed changes would extend the period to 3 years, or indefinitely, depending on circumstances, which would give most separating couples plenty of time to get everything sorted before the additional charges “kick in.”

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Another significant problem can arise where one party moves out of the former family home whilst the divorce and financial settlement is sorted. This is a very common situation. If the former family home has to be sold further down the line as part of the settlement, then the spouse who has moved out may no longer be able to claim the usual primary residence relief on the property on their share of the proceeds of sale.

The proposed changes would allow for the exemption to remain open in such circumstances. It is also proposed that additional relief would be extended in cases where the sale of the family home is deferred until a certain date or event in the future, such as the children finishing education, or a spouse remarrying.

If the changes are implemented as proposed, it will certainly help many families reduce the tax implications of separation, and maximise what remains available for them to meet the needs of 2 households in the future. The extended measures however will not negate the importance of getting detailed tax advice to ensure everyone knows where they stand, and all possible charges have been factored into the settlement.

Our specialist divorce team have extensive experience of working with tax specialists to ensure the most efficient settlement is reached and can make sure potential pitfalls are flagged from an early stage.

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