Getting married or entering into a civil partnership is a moment to cherish, and with it comes both an increased emotional and financial bond. It marks the start of a new chapter of what many couples hope will be the rest of their lives, but for some this experience unfortunately comes to an end.
When a couple separate or divorce, one of the last things they might be thinking of is the tax effect. However, timing could make all the difference. Separating just after the new tax year will provide you with the most time to make plans around your assets, along with a host of other considerations.
For those who have submitted applications for divorce it marks the end of the road, however, for others who are separating the best initial strategy is to maintain the status quo until the separation process is formalised.
The immediate priority should be to ensure the bills continue to be paid and the children (if any are involved) are taken care of.
Until you reach a mutual agreement on the division of your assets, both you and your spouse or civil partner are jointly responsible for debt, such as credit cards or mortgages. At this early stage, you should consider taking advice from a legal professional, accountant and financial adviser. Certainly, from a financial perspective, this will enable you to consider the division of any jointly owned assets early in the divorce process and help mitigate any potential tax implications.
It is important to formally recognise the date when your separation became permanent, with no hope of reconciliation, as certain tax breaks only apply up until the end of the financial year the split occurred.
The assets involved in divorce proceedings typically include any money, property, savings (including any individually owned or jointly owned pensions) and investments the pair of you own. You will need a solicitor to draw up a consent order, which is a legally binding document that confirms how you and your spouse or civil partner will divide such assets.
Usually, no capital gains tax (CGT) is owed on the transfer of property and unwrapped investments between married couples or civil partners. This exemption is lost once your relationship has legally ended, and it no longer applies after the end of the financial year in which separation occurs. After this point, you may have to pay CGT on the transfers of any assets worth more than the individual exemption of £6,000 for 2023/24 (decreasing to £3,000 with effect from 6th April 2024).
Splitting after the start of a new tax year on 6 April allows the most time to untangle your finances, while the worst-case scenario would be to separate in the final days, weeks or months before the end of the tax year.
If assets are transferred in the tax year that follows your separation, you will still be considered connected persons until the decree absolute, or dissolution order, has been issued to formally end your marriage or civil partnership.
Your home is more than likely the most valuable asset you and your spouse or civil partner own, and its transfer could be liable for CGT.
You and your spouse or civil partner can only count one property as your home at any one time to qualify for private residence relief. Therefore, it may be lost on your matrimonial home if you buy another property after leaving.
During a prolonged period of separation, any absence from your matrimonial home of more than 18 months may cause a gap in your relief. If one of you continues to live in the matrimonial home to raise any children you have, the court may put in place a Mesher Order which will preserve the relief for the spouse that has vacated the property until the house is sold at some time in the future.
The second largest asset owned by married couples and civil partners is typically pension savings, although where you live in the UK can affect how much you are entitled to.
The total value of both parties’ pension pots is taken into account when splitting assets in England, Wales and Northern Ireland, while only the value that has been built up during the marriage or civil partnership is considered in Scotland.
Whilst legislation allows pension savings to be split after divorce, research suggests the rules are failing to deliver equality as part of the divorce settlement. Royal London claims divorced women end up with less than a third of the average pension wealth held by a married couple, which makes seeking good financial advice all the more important.
Pension savings are usually split one of three ways: offsetting, earmarking, or sharing.
Update your will
Divorce does not automatically cancel an existing Will but merely means the divorced spouse or civil partner can no longer benefit. However, you should always update your Will when your circumstances change, and there are few changes as dramatic or substantial as going through a divorce.
It is generally advisable to cancel your Will outright and rewrite it completely from scratch in such cases, especially if there are children or grandchildren involved, to prevent any prolonged disputes or confusion.
The way in which tax charges (or tax relief, as appropriate) are applied depends on individual circumstances and may be subject to future change.
This is solely for informational purposes and nothing in it is intended to constitute advice or a recommendation. You should not make any investment decisions based on this content. The value of pensions can fall as well as rise and you may not get back the amount you originally invested.
While considerable care has been taken to ensure this information is accurate and up-to-date, no warranty is given as to its accuracy. This article constitutes a financial promotion.