This text is only a basic outline of taxation affecting family law. Should you require further information on any aspect of taxation as it affects your particular case, please do not hesitate to contact us at [email protected] or telephone 0845 601 7756.
Everyone has a personal tax allowance upon which no tax is payable. Then there is a basic rate of income tax (currently 20%); a higher rate of income tax (currently 40%) and a further rate of 45% of income tax on taxable income over £150,000.
Periodical payments are made from the payer’s net income and there is no income tax relief available irrespective of whether maintenance is paid through the CSA, through a Court Order or by agreement between the parties. Neither is any income tax relief available if a party pays towards household expenses directly to the supplier.
Capital gains tax
Capital gains tax (CGT) becomes payable upon the disposal of an asset or the receipt of money in respect of an asset if there is a “chargeable gain”. A chargeable gain may arise:
- Sales, gifts or disposes all or part of an asset;
- Receives a lump sum, such as an insurance payout.
People most commonly pay CGT on:
- Land; property, for example a holiday home; possessions worth more than £6,000; shares; and business assets such as premises or goodwill.
- CGT is calculated by working out the gain or loss for each asset disposed of less any allowable relief or expenses;
- Deducting the total allowable losses from the total gains provides the net gain or loss;
- Deducting allowable losses brought forward from earlier years;
- Deducting the annual tax free allowance;
- Any net gain is subject to CGT.
If living together, spouses and civil partners will usually not pay CGT on transfers between each other because they are treated as one person. Once they are separated however, they are not treated as one person and so a chargeable gain may arise. The issue of transfer of assets between separated spouses and civil partners arises when the parties agree a settlement where an Order is made in Court proceedings giving rise to a CGT liability. There are a number of exceptions to CGT including the family home (subject to time limits), premium bonds, a private car and cash. However, in order to raise cash, the party may have to dispose of an asset which would attract CGT.
A separating couple is treated by HMRC as a married couple for the whole tax year in which separation occurred. Therefore, assets transferred between separating couples in the tax year of their separation are free from CGT. In relation to the family home, in the majority of cases, there will be no CGT charge because the home is being used as a private residence and a person’s main residence is exempt from CGT. Therefore, if a spouse transfers their interest in the former home within 18 months of leaving, the gain will be exempt from CGT (so long as they qualify for principle private residence relief). If a party who has been out of occupation of the family home for more than 18 months an extra – statutory concession applies in situations where a party transfers their share in the family home.
The concession applies where a spouse transfers an interest in the family home to the other spouse as part of a financial settlement on divorce or separation, and;
- The other spouse continues to occupy the family home as their only or main residence; and
- The transferring spouse has not elected to treat any other property as his only or main residence.
The transferring spouse is deemed to continue in occupation of the home until the date of the transfer, however long it is since they left the family home.
Inheritance tax could be payable on any transfer value made by a person while that person is alive. When a person dies, the person is deemed to make a transfer of value equal to the value of his entire estate immediately before death. There is a “nil rate band” exemption within which transfers of value made within a 7 year period will be free of tax. The current nil rate band for the tax year 2015 to 2016 is £325,000. During a marriage or civil partnership transfers of assets are exempt from inheritance tax until the date of Decree Absolute.
Stamp duty land tax
Stamp duty is a tax charged in respect of “land transactions”, which effect the transfer of interest of land. The amount of stamp duty paid is based on the amount of consideration provided for the land. This tax is encountered during house sales and purchases and is taken into account when calculating the money available to the parties.