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Do I Have to Pay Tax on my Divorce Settlement?

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Tax is one of those thorny issues that we all are tempted to leave and sort out on another day but if you are a divorce and financial settlement solicitor you can't afford to ignore tax on divorce as divorce lawyers are asked the question ‘’Do I have to pay tax on my divorce settlement?’’

London divorce solicitors 

If you are thinking about a separation or divorce from your husband or wife but are worried about the tax implications of any financial settlement then it is best to take specialist legal advice to explore your options and get guidance on your likely financial settlement and any tax considerations.

The friendly and approachable London divorce team at OTS Solicitors can help you secure the best financial settlement that meets your needs and takes into account any tax implications arising from the financial settlement. Call us on 0203 959 9123 or click here.

What tax is payable on divorce?

There are two main taxes to consider on divorce:

Divorce tax on spousal maintenance and child support

Divorce solicitors are asked if tax is payable on divorce payments such as spousal maintenance or child support.

The recipient of the spousal maintenance or child support doesn’t pay tax on the payment, whatever their financial circumstances i.e. whether they don’t pay tax, are a low rate tax payer or a high rate tax payer. That is because the payer of the spousal maintenance or child support has already paid tax on their income before paying the spousal maintenance or child support to their former husband or wife. If the recipient had to pay tax as well then that would mean the same money was being subject to ‘’double taxation’’ and that wouldn’t be fair.

When London divorce solicitors look at whether spousal maintenance and/or child support should be paid, and if so how much, they look at the ‘’net effect’’. That means that they look at how much money, net of tax or other liabilities, a husband and wife will each have left to live on.

Although a recipient doesn’t have to declare spousal maintenance and child support as income for tax purposes the income may be relevant and declarable if the recipient is claiming certain types of allowances or benefits. If you are making a claim it is best to check to see if your spousal maintenance or child support are relevant to your claim.

Divorce tax on property and asset transfers

If you are transferring assets or property as part of a financial settlement or selling assets to fund a financial settlement it is best to know the tax implications. That way you can make informed decisions.

In the turmoil of divorce and financial settlement proceedings it is easy to forget about tax. However, London divorce solicitors say that you ignore tax at your peril.

Take the case of a couple, married for over thirty years, who agree to split everything equally. The husband agrees to keep his business and the wife agrees to keep other assets giving them a broadly equal split of money. However, when the husband comes to sell his shares in the business shortly after the divorce, in order to buy a new home , he finds capital gains tax will be payable on the sale of the shares . A capital gains tax bill on the sale of company shares can be massive meaning that in real terms the husband gets a lot less than half the family wealth.

Equally, if you are the wife in this scenario and the husband says the net value of the shares is £X, it is best to check that the capital gains tax bill has been correctly calculated and all claims and allowances made as otherwise the husband could end up with more than fifty percent of the net assets.

Can you reduce your tax liability on a divorce settlement?

It is possible to reduce your tax liability when selling or transferring assets and property as part of a divorce financial settlement. In order to do so, it is best to get expert legal advice and accountancy advice at an early stage. That’s because the timing of your separation or divorce and the structure of your divorce financial settlement can affect how much tax you end up paying.

The end of the tax year, the 5 April, is a crucial date if you are planning to separate or divorce.

The date of your separation is important to divorce solicitors and accountants as a husband and wife or civil partners can transfer assets between themselves without incurring a CGT liability. If you separate you can still transfer assets between you, free of capital gains tax, but only until the end of the tax year of your separation. That means if you separate on the 30 March you have less than a week to transfer assets whereas if you separate on the 10 April you have nearly a full tax year to do so.

When it comes to capital gains tax it really pays to get expert tax advice. That is because the rules are so complicated and can catch out the unwary. For example, you may assume that if you sell a family home as part of a divorce financial settlement there won't be any tax to pay as it was your family home and therefore falls within the principal private residence exception. However, if you haven’t lived in the house for a while capital gains tax may be payable on sale.

The Inland Revenue has said that with effect from the 6 April 2020, the time you can live away from the family home and still claim principal private residence relief will reduce from eighteen months to nine months. This will affect some divorcing couples and should be factored in when looking at the net effect of asset distribution and the divorce financial settlement.

Divorce and non-UK property

If you and your husband or wife have overseas assets, such as a Spanish holiday home or a Swiss Chalet, you don’t just need to think about your UK tax position but the tax payable on the sale or transfer of the non-UK asset or assets.

Tax – the need to plan ahead

It is best to take legal advice on the UK tax implications of separation, divorce and any financial settlement as soon as you can. If you chose not to do so then this could be financially very expensive. With proper legal advice and accountancy advice the tax implications of your divorce and financial settlement should be minimised.

London divorce solicitors

For expert and pragmatic advice about financial settlements after your separation or divorce call the specialist divorce law team at OTS Solicitors on 0203 959 9123 or complete the online enquiry form.

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