“No Fault Divorces” were introduced on 6 April 2022. Since then applications for divorce have soared by more than 50%. With everything else that is going on during a divorce, don’t forget to think tax. Some of the ways tax is affected include:
Income tax is largely only affected with the ability to transfer surplus allowances from one spouse to another
Capital Gains Tax (CGT) is affected in several ways. The tax-free inter-spousal transfer relief is only possible in a tax year when the parties live together as a married couple at some point. However, they remain as connected persons (requiring assets to be transferred at market value) until the date of divorce. This can cause unexpected liabilities where the parties occupy the same residence but not as a married couple. For business assets, a hold-over relief claim could be signed allowing any gains arising to be deferred but as this would cause the recipient to have a larger potential CGT liability when they sell the asset, both parties may not agree to sign the hold over election anyway.
The former marital home can also cause a CGT liability. If one party has left the former marital home, they now only can claim an additional 9 months of automatic residence for CGT exemption. This can quickly cause a chargeable gain to start to accrue. Everyone does have an annual CGT exemption, but this may be quite small against the potential gain. Additionally, if a liability exists on disposal, you must also report and pay CGT online to HMRC within 60 dates of completion. (Main Residence Relief is extended where Mesher Court orders are concerned.)
The situation is better for Inheritance Tax where the general tax-free exemption for spousal transfers stops on the date of divorce, not the date of separation. You should note, however, that unlike marriage, a divorce will not automatically nullify a Will so you should think about those as well.
Finally, Forensic Accountants excel at seeking out hidden assets, determining the real, not claimed, value of assets and tracking down concealed wealth. Their skills are particularly useful when the one who initiates the divorce has had the time to hide assets and potentially lay disinformation.
