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Tax implications of separation and divorce: Dividing assets between partners and the inheritance tax impact

| Rebecca Bright | 26 September 2023

It’s far better to make plans and take advice at an early stage during divorce proceedings, as there are a number of tax implications to consider during the lengthy process.

When a married couple separates, it’s likely that the marital assets will need to be divided between both divorcing parties, and it’s important to look out for financial liabilities to preserve your wealth during this time.

Here we explain what some of these tax implications are and how you can prepare for them.

Division of investment assets

If there are investment assets to be divided up between the parties of the marriage, it’s important to consider what capital gains tax (CGT) charges might arise. Depending on the time scale of divorce proceedings, the division of assets between separating couples runs a real risk of CGT liability.

If there are no particular emotional attachments to assets, we would recommend that you undertake a review of how to divide them, to minimise the potential CGT charge as much as possible.

In all cases, it’s usually necessary to calculate potential CGT charges if assets are disposed of, as these are often taken into account when looking at net values allocated to each party.

Our advisers can work with you to ensure all available reliefs have been considered to reduce these gains as far as possible.

Losses on transfer of assets to connected parties

A very strange situation can arise where assets that are standing at a capital loss are transferred between parties to the marriage before the divorce has been finalised.

If this particular set of circumstances arises, on the transfer of the loss-making asset from one party to another, the disposing party will report a capital loss.

However, as this is treated as being a transfer to a connected party, this loss can only be set against gains on disposals made to the same connected party (spouse), while they are still connected (for tax purposes). These are known as ‘clogged losses’.

Our team can make sure a review is undertaken to look at timings of transfers, to avoid this clogged loss situation from arising, and can advise on how best to time transactions, to minimise this risk.

Inheritance tax implications of divorce

Transfers between spouses are exempt from inheritance tax (IHT), and this continues throughout the period of separation up until the decree absolute. Any transfers over that amount or made after the decree absolute are treated as ‘potentially exempt transfers’ (PET) where there are no other IHT reliefs available.

Timing is therefore very important in making these transfers.

There is a common misconception that a divorce nullifies a Will made prior to the divorce which names the spouse as a beneficiary. This is not the case – the original Will still stands, it just treats the (now ex) spouse as though they have died, and any bequests to them are ignored.

This does not necessarily mean that IHT charges will arise, based on how the current Will is worded.

If post-divorce, the value of your estate means that IHT may be due, or you have minor children you wish to make provision for, we would strongly recommend that you write a new Will as part of this process.

It may be that a trust structure would be an appropriate addition, and we can guide you on this.

If you’re considering or undergoing separation or divorce, it’s important to seek specialist tax advice early on.

Get in touch with our team to find out more today.


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