Certainly the pandemic has inadvertently brought the focus on domestic arrangements, as typically break ups spike after families spend longer times together. For example, during school holidays and over Christmas and the nature of lock downs and other pandemic consequences have exasperated such issues.

On Separation

There are income tax considerations including reconsidering entitlement to child benefit, impact on any marriage allowance and universal credit claims etc.

In terms of maintenance payments, there is limited tax relief available for maintenance payments between ex spouses where one was born before 1935. Not considered further in this article however for younger tax payers no relief is given for maintenance payments but the maintenance is always tax free for the recipient.

On Divorce

When a couple divorce there is likely to be a splitting of assets which may have capital gains tax implications. Whilst there is an exception under TCGA1992 section 58 for the transfer of assets at a no gain/no loss between spouses, to apply the individual must be living with their spouse in the year of assessment. Transfers between separated spouses continue on the no gain/no loss basis up until the end of the tax year of separation and if the divorce is finalised in the same year as the couple separated the no gain/no loss transfer position will end on divorce.

After separation a married couple remain “connected parties” under TCGA1992 section 286 so chargeable transfers between them take place at market value until the divorce is finalised.

The breakdown of a marriage can be an emotive time and it can take many months or even years to agree the terms of the divorce and the appropriate assets. This is against a backdrop of the no gain/no loss transfer spousal asset exemption only lasting until the end of the tax year of separation so capital gains tax is often an issue to consider on divorce.

The Office of Tax Simplification has recognised this and in a recent report considering capital gains tax recommended extending the no gain/no loss window on separation to the later date of:

• The end of the tax year ending at least two years after the separation event or
• Any reasonable time set aside for the transfer of assets in accordance with a financial agreement approved by a court.

This is of course only at this stage a recommendation and is not the current position. So care is still required.

The Marital Home

Under TCGA1992 section 222 a married couple who live together can only have one main residence for private residence relief. From the date of separation each can have their own residence. Please note however the period of deemed ownership under TCGA1992 section 223 has from 6 April 2020 been reduced to 9 months and therefore full relief will only be available if a spouse disposes of their share of the house within 9 months of moving out.

There is however a relief available under TCGA1992 section 225B specifically for disposals of the former residence in connection with divorce. The conditions to secure relief however includes that the disposal must be to the ex spouse so a sale to a third party would not obtain relief. As an individual can only have ultimately one main residence at a time the relief is not available if an election has been made in the meantime for another dwelling to qualify as the main residence. Therefore if the above relief is given, a proportion of gain on any new house acquired will be charged upon its disposal.

Stamp Duty

Transfers of property in connection with divorce are exempt from stamp duty land tax if the transfer is made under a court order or under an agreement between the couple in connection with the dissolution of their marriage or separation order.

Conclusion

Generally income tax is considered effective from the date of separation but for capital gains tax the transfers can be made at a no gain/no loss until end of the tax year of separation but there is likely to be capital gains tax implications on any later asset transfers.