If you’re undergoing a divorce settlement, there are some situations where you’ll need to pay tax – either on the money, assets or property transferred as part of the divorce, or on any income generated from assets you receive.
During what can be a drawn-out, stressful process, the last thing you want is an unexpected tax bill. That’s why it’s important to know the potential charges you might face.
In this article, we’ll use the term ‘divorce’, but it’s worth bearing in mind that the same basic rules also apply to ending a civil partnership.
Capital gains tax on divorce
Capital gains tax (CGT) is the most likely to apply in a divorce settlement. This is sometimes due on the gain you make when you sell something that’s increased in value since you received it. It can also be due when you transfer an asset to another person.
Transfers between spouses are exempt from CGT, however, and you usually won’t have to pay on transfers that are made before the divorce.
Once the process of separation begins, however, you’ll have what’s known as a ‘no gain, no loss’ window during which no CGT applies on transfers between you. This currently only lasts until the end of the tax year in which you separated – but is due to be extended in April 2023 to a period of three tax years.
If you transfer assets after the divorce, you might have to pay CGT.
Stamp duty on divorce
In Scotland, land and buildings transaction tax (LBTT) applies on the purchase or transfer of land or property, both residential and non-residential.
There’s an exemption to this tax for properties that are transferred as part of a divorce settlement, so in many cases, it won’t apply.
In some situations, however, it isn’t that straightforward. For example, if one party retains part ownership of the family home while purchasing their own property to live in, they might find themselves paying both LBTT and an additional surcharge for second homes.
The best way to avoid this is by making sure you plan carefully.
Other taxes
In some cases, your divorce could affect how other taxes apply to you.
If you’re allocated assets that produce an income, for example, this will be subject to income tax. And if you had been making use of the marriage allowance before your divorce, you might see a difference in your personal allowance.
Transfers made during your separation or under the terms of a court order relating to divorce proceedings will also usually be exempt from inheritance tax. Maintenance payments are generally also exempt, as they’re classed as ‘regular payments from income’.
Get in touch
Tax on divorce can be complicated, and it’s always best to seek professional advice to make sure you’re aware of all its potential implications.
Talk to us for advice, or other personal tax planning guidance.