This article covers the tax issues to consider if you are divorcing and live in England and Wales, or Northern Ireland. Scotland has a different legal structure, so it’s important to speak with a qualified financial adviser and a solicitor if you are separating from a spouse or civil partner in this part of the country.

At a glance

• Dividing your assets when you divorce can have a direct impact on your tax situation.
• Pensions are often overlooked, but they’re a valuable asset and can be dealt with in several ways as part of your settlement.
• Speaking to your financial adviser can help you make the right decisions during this difficult time.

Divorce changes everything. It can impact where you live, what you earn or own, your friendships and family, and your own physical and mental wellbeing. While many of the conversations and decision-making during a divorce concern money and assets, the last thing on your mind may your tax bill.

Splitting up with someone can have a big impact on your personal taxes; something that you may not realise until further down the line after an agreement has been reached, and key decisions taken.

Getting the best advice you can – both legal and financial – is essential to make sure you get what you’re due when your marriage or civil partnership breaks down.

Will divorce affect my taxes?

You may think there’s no reason for the taxman to be sticking his nose into your financial affairs at such a difficult time, but there are tax implications when you split assets, it’s important that everything is divided in the right way, from joint possessions, down to pensions.

Pensions are the personal assets most often overlooked; especially if you’ve both moved employers and have more than one pension. But they’re hugely valuable and become more so over time.

You have three options when splitting a pension: earmarking, sharing, or offsetting against other assets.

• Earmarking. This allows the court to order that all, or part, of a member’s pension must be paid to their ex-partner, when they reach retirement age. It’s rarely used, and does mean that you never have a ‘clean break’ since you still have an ongoing link to your ex. 
• Offsetting. This means treating a pension as a single asset awarded to one person, while the other is awarded other assets of the same or similar value. It’s a straightforward solution, but you should think about whether one person might lose out on the long-term returns and tax relief a pension can bring.  
• Pension sharing. This means that the pension is split between the spouses or civil partners. The advantage of pension sharing is that each person can manage their pension the way they want, independent of their ex-partner. It means you can put clear water between you and your ex, and hopefully avoid disagreement or acrimony in the future. 

Making sure that you’ve included any, or all, pensions in the separation settlement is particularly important for women, since they may have smaller pensions than men because of the gender pay gap.

Changing your named beneficiary

Again, something that we often forget to do even if we’re not getting divorced. Every pension you have should have a named beneficiary who will receive the lump sum or the pension payments if you die. When a relationship breaks down, or a new one starts, it’s easy to forget to change the person who you’ve nominated. So when you’ve made the key decisions about splitting your pension assets, don’t forget to check whose name is on the dotted line.

Will divorce affect my Capital Gains Tax?

Splitting assets, especially high value ones, can result in a gain to your overall worth or income. This could alter your tax bracket, and it could also have an implication regarding Capital Gains Tax (CGT). Under new rules introduced in April 2023, separating partners now have up to three years after they stop living together to transfer assets, before they become liable for CGT.

This is called the ‘no loss-no gain’ window.

If you transfer or receive any assets outside this time frame, you may need to pay CGT. The current allowance now stands at £6,000 for the 2023/24 tax year, meaning that you can gain £6,000 before needing to declare any gains on your tax return. However, in the 2024/25 tax year, this allowance will halve to £3,000.

There are ways to mitigate CGT, including spreading the transfer of assets over several years. A financial adviser will be able to help you make the most of your tax-free allowances and make sure that you don’t miss out. When people are separating, they can find it difficult enough to make some of the major decisions with a clear head, without keeping an eye on the ‘small print’ of all tax regulations.

What is Private Residence Relief?

Anyone is eligible for Private Residence Relief (PRR) if selling a home that has been a main residence, and which hasn’t been let. When two people divorce, and one moves out of the family main residence, both can still claim Private Residence Relief if that property is later sold. The relief means that neither party will need to pay CGT on their share of any gain from the sale.

However, there can be certain conditions that come into play, so making sure you get appropriate financial advice is essential.

Can I claim tax relief on spousal maintenance?

If you and your ex-partner have children, there are also some tax implications to consider.

If you’re paying maintenance to your former spouse or civil partner, it’s possible to claim tax relief against this, which will help to reduce your own tax bill.

If you split from a higher-earning spouse or civil partner and have a High-Income Child Benefit Tax Charge with your spouse, then you may be able to claim Child Benefit in full. You can date this from whenever you stop living together, even if the divorce hasn’t been granted yet. You can back-claim up to three months benefit too.

Financial advice in challenging times

You don’t need to make decisions about your personal finances alone. Divorces and separations can be messy and emotionally bruising, clouding our ability to think straight. We all deserve practical, sensitive financial advice at this time, from someone who understands the situation, but is one step removed from the family concerned.

Your adviser can help guide you through, from rebalancing your day-to-day budget, to looking afresh at your long-term goals.

We’ll have your back, until you’re back on your feet again.

Need some practical, sensitive financial advice regarding the financial fall out from a relationship breakup? Get in touch with us today.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

SJP Approved 18/01/2024