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Divorce – Everything you need to know about reducing CGT and divorce tax

How to avoid the divorce tax and save thousands..

What is divorce tax and what are the tax implications???

Find out when the best date to separate is, to ensure optimum tax savings and less divorce tax....

Where to begin....

Aside from the emotional turmoil that a divorce can evoke, it can also be distressing deciding who gets what .

According to new research, it is suggested that many women, when divorcing fail to mention pension splitting meaning that collectively, they could be losing out on up to £5 billion which could seriously affect their personal finances and divorce tax .

Divorce - the facts..

In England and Wales, since 2000, divorce rates have dropped by 28%, going from 141,135 per annum down to 101,055 in 2015. The increase has been seen amongst the over 60’s with the rate increasing from 9,997 to 17,249 per year – a 43% rise!!

It would appear that the main reason for the increase in ‘silver splitters’ is a longer lifespan which results in people demanding more from their life. The growing online dating scene is also tempting many people to seek an alternative future. The taboo that surrounded divorce in years gone by has faded considerably, and many older people are finding themselves working past the state pension age and are therefore able to support themselves if the marriage fails.

You may be wondering, 'what are the tax implications'?

Without sounding too harsh, if you’re thinking of exiting your marriage, then for optimum tax savings it is best to wait until 6 April. Many couples are unaware of the tax implications following a divorce and end up paying far too much tax (divorce tax) – the last thing any family needs after the breakdown of a relationship.

Believe it or not, what is the most important thing you need to know about divorce tax ??....

Whilst couples are married and live together, they can transfer assets between each other without a capital gains tax charge (CGT) 

However, what they don’t realise is….

This benefit will be lost at the end of the tax year after the permanent separation NOT after the divorce, an example could be a couple deciding to have a trial break on 1 January, then six months on deciding that the relationship is over. By this stage the ability to transfer assets between each other, tax free, has been lost, incurring divorce tax.

But, is there anything you can do about this?

In an ideal world the separation would begin on 6 April, leaving an entire year for the couple to work out the transfer of assets. For most people, the reality is that the CGT exemption has gone past, by the time they have thought about their divorce tax planning.


There are other tax exemptions and other shares and property that can be transferred without incurring a tax charge, such as:

1-Businesses – These can be given away without incurring a capital gains tax charge, for example:

Sole trader businesses

Partnership interests that are trading

Particular shares within unquoted trading companies

There are specific criteria that must be met, such as the business is not able to be a property rental/investment business. To be able to implement this, a formal election signed by both ex-spouses must be sent to HMRC. To qualify, the requirements are fairly detailed, so it is advisable to speak to a tax professional.

2-The Family Home- If this has been the couple’s main residence throughout ownership when this will qualify to be capital gains tax-free on transfer. This is due to principal private residence relief (a capital gains tax relief) which can be used on the sale of a property which has been used as a main home.

3- Principal private residence relief (PPR) – this can sometimes be used whereby the home was not always used as the main residence. The relief is able to be extended via many ways, e.g.: if a house has been the couples main residence at some point, then the last 36 months of ownership are free from tax.

The relief on PPR resulting from a divorce can be extended, which would decrease or even eliminate the tax bill due on the transfer of the family home on divorce. There are conditions that need to be met, as listed below:

Due to the separation, one spouse or civil partner no longer resides in the family home

The partner who moves out, hasn’t formally elected with HMRC for another house to be classed as their main home

The individual who moves out, goes onto give their ex their interest in the family home • The remaining partner keeps living in the family home as their main house

The transfer is included as part of the divorce settlement

4-Inheritance tax -Until the final annulment of the marriage or civil partnership, transfers between spouses are exempt for Inheritance Tax purposes (IHT). Also exempt are transfers made on divorce or for the upkeep of the family.

By now, you’re probably thinking, what about pensions?

According to research from Scottish Widows, out of 10 couples splitting up, 7 did not discuss their pensions at all throughout the divorce proceedings. Generally, men will have a larger pension pot than women.

While most women will fight tooth and nail for their share of any jointly owned property the same cannot be said for a fair share of the pension – which is usually the second biggest asset

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These days, a married couple’s average retirement pot equals approximately £132,000 (five times the average salary at £26,000). At least a quarter of women do not even have a pension plan which could be seen as a dangerous oversight.

As a result of a divorce, two fifths of women stated that their retirement prospects worsened, this number was twice as many as men. Reasons surrounding why a woman’s pension savings can be impacted more so than a man’s are down to things such as maternity leave, career breaks to raise children and the gender pay gap – all can limit the earning potential of women.

So, how should assets be split??

The easiest way to ensure a fair and even split is to establish what pensions there are, what the value is and how they compare with property, savings and any other assets. Assets can be ‘offset’ which means that, for example, if there was a pension, one could keep this while the other gets a greater share of the other assets, helping to reduce divorce tax.

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Another option is the courts, they have the power to implement a ‘pension sharing order’ which simply means one person giving a percentage of their pot to the other. This order was actually implemented almost two decades ago, but is not used by many. This is because many individuals are not entitled to legal aid and become so tangled up with the financial issues that they miss out on the basic legal advice. Many cannot afford to pay for expert financial and legal advice when dealing with complex public-sector pension schemes – which is unfortunate as it could prove to be beneficial and lower divorce tax.

Just keep on working…

Many divorcees carry on working following a split. Research has revealed that at least a quarter of separated people aren’t sure if they will ever be able to retire (which is double that of married people). As people grow older, the challenges that are faced become heavier when coupled with a divorce, leaving some with financial difficulties and possible shocks.

On the up side though, although more over 60’s are seeking a divorce, the number who care getting married is also increasing proving that hope triumphs over experience.

What do you think, is it really once bitten twice shy or does love  really conquer all?

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Sarah Aubert