Tax Effects of a Divorce

Why Tax Evidence Matters in Divorce

The gross market value of an asset can differ significantly from its net value after tax.

By Liz Williamson

For example:

• A property worth £1 million may carry a significant embedded Capital Gains Tax liability that would arise on a future disposal
• Shares in a company may attract future tax charges when sold.
• Business assets may qualify for reliefs which affect their overall value.
• Different assets can generate very different levels of future income.
• Historic tax issues can affect the eventual value available to each party.

A settlement can appear equal on paper whilst producing very different outcomes after tax is considered. Understanding these issues at an early stage can help avoid costly mistakes and facilitate quicker negotiations.

Capital Gains Tax and Divorce

Capital Gains Tax (CGT) is often one of the most important tax considerations during financial remedy proceedings.

Assets commonly affected include:

• Family homes
• Buy-to-let and investment properties
• Holiday homes
• Shares and investment portfolios
• Business interests
• Cryptocurrency investments
• Valuable personal possessions

Although transfers between spouses may qualify for favourable tax treatment, this does not always eliminate tax. In many cases, the tax charge is postponed until a future disposal of the asset. The resulting deferred Capital Gains Tax liability should therefore be considered when assessing the true net value of the asset.

Our reports explain the tax consequences of retaining, transferring, or disposing of assets so that all parties have a clear understanding of the position.

Key Tax Issues to Consider During Divorce

1. Obtain expert tax opinion early

Once assets have been identified and valued, consider how tax evidence will be obtained. If both parties intend to rely on the same expert, it is advisable to agree the appointment and scope of instructions before costs are incurred. Joint instructions can often save time, reduce duplication of fees, and help avoid conflicting advice.

2. Don’t assume the family home is tax-free

Many people assume that Capital Gains Tax will never apply to the former matrimonial home. This is not always the case.

You should understand:

• Whether Private Residence Relief is fully available
• The impact of moving out of the property
• Potential exposure to Capital Gains Tax on a future disposal
• Whether any elections or planning opportunities should be considered

3. Consider unrealised tax liabilities on investment properties

Even where an asset transfer can take place without an immediate tax charge, a future tax liability may still exist. Understanding this deferred tax liability is essential when comparing the relative value of different assets within a financial settlement.

4. Review all assets, not just property

Tax issues can arise on a wide range of assets including:

• Unquoted and quoted shares
• Business interests
• Trust interests
• Cryptocurrencies
• High-value personal possessions
• Overseas investments

5. Focus on net value rather than gross value

When negotiating a financial settlement, consideration should be given to:

• Outstanding mortgages and loans
• Potential tax liabilities
• Costs of sale
• Professional fees

A proper assessment should focus on the net value available to each party rather than simply the headline market value.