This heading is not intended to be a cynical observation brought on by the latest divorce statistics. Rather, it is a reference to the significance of timing with regard to tax liabilities in divorce settlements.
Tax may not be the first thing on a person's mind as their marriage breaks down. However, tax issues often rear their head when they are the last thing the parties want to think about and, as far as financial settlements in divorce are concerned, timing can be everything. By way of example, let us say that Alex transfers a property to Sam as part of a divorce settlement and that this property is standing at a gain. If the property is transferred either before or during the tax year of separation, the transfer will not trigger a capital gains tax charge. If, however, the property is transferred after that time, Alex will be deemed to have sold the property to Sam at its market value and could suffer a capital gains tax charge at a rate of up to 28%.
Often the tax adviser is one of the last professionals to be called upon in a divorce scenario (after the marriage counsellor, the private detective, the locksmith, the divorce lawyer). Sometimes we are simply called upon to calculate the tax liabilities and make the appropriate declarations to HMRC. However, there are advantages to taking tax advice earlier in the process.
While it might not be possible or appropriate to delay a separation for tax purposes (though separating on the 5 April is probably the worst day possible!), appreciating the significance of timing might focus the parties' minds on reaching a faster agreement and, even if they cannot, an understanding of the tax liabilities might at least help the parties to formulate a settlement that crystallises the minimum amount of tax. Further, Alex needs to be aware of potential tax liabilities to ensure that the extent of the financial settlement takes these into account.
Where there is an international angle to the divorce (such as one or both parties being non-UK domiciled), the issues relating to timing become even more significant and these will be covered in the next In the Spotlight.
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