It is an unfortunate fact of modern life that many marriages do not survive. When separation, divorce or dissolution occurs, there will almost inevitably be some tax consequences.
Allowances
The married couple’s allowance is only available to couples in which at least one spouse or civil partner was born before 6 April 1935. The allowance will cease at the end of the tax year in which separation occurs. The allowance can also be transferred between them under certain circumstances.
The marriage allowance allows any married couple or civil partnership to transfer part of their income tax personal allowance to the other. It is only available where both of the couple are basic rate taxpayers, and the amount that can be transferred is 10% of the standard personal allowance (£1,250 for 2020/21). Applications must be made online.
The child tax credit, is available to each former spouse or civil partner with one or more children living with him or her (i.e. each spouse will be entitled to the credit, as a single parent, if one or more children live with him or her).
Maintenance payments
Maintenance payments qualify for tax relief only where a spouse, civil partner or former spouse or former civil partner was born before 6 April 1935 and only if they are legally enforceable. This will be the case if they are made under a court order, a Child Support Agency assessment, or a legal deed of separation.
Such maintenance payments must be made to your divorced or separated spouse or civil partner (if they are not remarried or have not entered into a new civil partnership) for the benefit of him or her or of your child under twenty-one living with him or her.
The maximum tax reduction available is £326.
Maintenance payments received do not count as taxable income.
Transferring assets
Assets transferred between spouses or civil partners in a tax year during which they have lived together, including the year of separation, are exempt from capital gains tax (CGT) and inheritance tax.
From the end of the year of separation until the decree absolute, the former spouses or civil partners are still regarded as connected persons for CGT purposes, and therefore all transfers between them will be treated for tax as if made at full market value, even if no consideration changes hands.
Thereafter, transfers will be treated as being at arm’s length and therefore transfers will, for CGT purposes, be treated as disposals or acquisitions for only such amount as changed hands.
Where the couple separate but decide not to divorce, the inheritance tax exemptions still apply to them. This can be a useful relief for couples who remain on good terms.
Please contact us if you would like further help or advice in this area.