Divorce doesn’t have to be taxing
Director Rita Gupta writes:
As experienced family lawyers, we fully appreciate that divorce is about much more than just the law. The impact of such a life-changing decision reaches beyond just divorce paperwork and court appearances, impacting on your family life, finances, living arrangements, social life, and most importantly, your well-being. For that reason we take a holistic approach to divorce and separation.
In a new series, we’ve collaborated with trusted colleagues in a variety of professions to provide you, our clients, with helpful advice as you progress from being a married spouse to single person again.
Our first article has been created with Ross Garfitt, Director at Langdowns DFK Chartered Accountants in Basingstoke, Hampshire. Together, we’ve identified the top 10 tax and financial issues to consider when divorcing or separating.
#1 Involve your accountant from the outset
Any divorce financial settlement will be based on a variety of sources, but primarily your personal and any associated company accounts. Timing is crucial - the earlier an accountant’s advice is sought, the better.
This is particularly important if you are involved in a company or business with your spouse, but not taken an active role recently. Your tax returns may have been completed by your spouse or the company accountant, and you have just signed them off without full consideration and indeed sometimes without any consideration.
If that’s the case, it’s important that you seek separate representation from an accountant with no association with your spouse or your company.
Your own accountant can check, for example:
- The company accounts in detail
- The company tax returns are in order and accurate
- Your association with any company, such as your status as a shareholder
- You have received the appropriate dividends
- Your tax returns - do you have any hidden liability?
#2 Assets and CGT
When the time comes to divide assets, it’s important to consider all the tax liabilities that might incur by transfer or sale. What’s more, the timing of the actual date of the physical transfers of the property/asset is important. Here’s why:
- If you transfer assets in the tax year of your separation, this still counts as a spouse to spouse transfer. No tax will be paid, as this is deemed to be on a ‘no gain no loss’ basis.
- If you have rental or second properties, you need to consider the relevant CGT (Capital Gains tax) allowances. CGT is paid on the profit you make when you sell or dispose of any property that’s increased in value since you purchased it.
- If you are using part of the property for business purposes. e.g. Air BnB, CGT may be liable on this part of the property.
- If you decide to rent a room and take in a lodger, you can earn up to £7500 tax free. This income should still be included in your tax returns.
(For more information on CGT, see capital gains overview from the government)
#3 Selling your home and CGT
If your divorce settlement involves your principal private residence (and most divorces do), the amount of CGT due will depend of your entire ownership period, which may not be the same as how long your have lived in the property.
You have 18 months from the date when you move out to sell or transfer the property to a spouse, and for there to be no CGT with this period. This is important to consider if you have a long separation period before you start formal divorce proceedings.
A higher rate of Capital Gains Tax applies to the sale or transfer of residential property, than on the disposal of some other chargeable assets.
#4 Being a company secretary
If you are a company secretary, or your spouse is, but you/they don’t actually work in the business, do not sign anything before taking advice.
You cannot force a company secretary to resign just because they are your spouse. As with regular employees, the company must comply with employment laws when seeking to remove or replace a company secretary. Do not be coerced into resigning as a company secretary without seeking our advice.
#5 Disposing of company shares
Entrepreneurs’ Relief may entitle you to pay less CGT when you sell part of all of your business. All gains on qualifying assets will be subject to just 10% tax.
To qualify for Entrepreneurs’ Relief, a company has to be your personal company and a trading company i.e. not dormant. You also have to:
- Own at least 5% of shares
- Have voting rights
- Be an officer or an employee of the company for the 12 months before
The substantial difference between assets that qualify and are taxed at 10%, as opposed to non-qualifying assets incurring tax at 20% is something all parties should consider. This, in our view, leads to obligations on both parties to ensure that this valuable tax relief can be retained.
#6 Joint businesses
If you own a joint business with your spouse, it’s important that you retain full access to information, accounts, and retain your ability to attend meetings. The main differences lie in whether you are a Director or a shareholder.
- As a shareholder, you are entitled to see the full accounts, and not the “abbreviated” accounts from Companies House. You do not have to wait until financial disclosure has taken place for this information. This will enable you to take more effective matrimonial advice on your assets.
- If you are a Director, you have a much higher entitlement. You can (and should) attend Directors’ meetings, and your spouse cannot exclude you.
# 7 Tax avoidance schemes
It’s important to know if you have you entered into a tax avoidance scheme (e.g. film scheme). There may be tax implications as these types of schemes can be challenged by HRMC. You should seek advice, and bring this to the attention of your lawyer and accountant as soon as possible.
Are you or your spouse approaching 55 or over? If you are having difficulties in your relationship, do consider your ability to draw down some of your pension early. You can draw down up to 25% of the entire pension pot, tax-free. The rest is taxed at whatever your highest rate of tax is in that financial year.
You may need to consider taking steps to prevent your spouse drawing down all or part of the pension pot, in an attempt to defeat your claims. Once the money is gone, it’s gone! You can try and run ‘add back’ or ‘bad behaviour’ arguments to recoup any money, but need overrides all other arguments and trumps all!
Similarly, if you are seeking to draw down on your pension, we would advise you seek an accountant’s advice on the implications. If you are in income drawdown i.e. are drawing an income from your pension, you then can’t pay more than £4000 into your pension per annum.
#9 Personal expenses your company pays for
If your company is paying the school fees or your mortgage, it is usually drawn from the company’s loan accounts. This is something you will definitely need to take advice on. For example, are you overdrawing from the company? Also, if you are paying for a nanny or other child-related expenses, if a spouse stops paying for any of these through the company, you can claim for them through spousal maintenance.
On the same point, if you are paying maintenance via your company, you may be paying something which is non-taxable in a taxable way, as it will be counted as dividends.
#10 Your employment status
You may decide to start selling on the internet or working from home, particularly if you are now a single parent. If so, you need to be registered as a business with the revenue for self-employment and NI purposes. You must also complete self-assessment returns, which can be very daunting.
By engaging an accountant to help you with your accounts, however basic those accounts may be, you can save yourself precious time (and often money too).
- Keep records of all income and expenses from the moment you start.
- Find an accountant who is happy to help you set up your accounting and invoicing systems, particularly if you have never done them before.
- If you are a hairdresser, a therapist or offering services at your home, this can lead to an insurance liability.
- If you use your home as business premises with visiting clients, your local authority will need to know for business rates assessment. You may need to pay business rates if you are selling goods or services to people who visit your property, or if you have made changes to your home for your business
Need more help and advice?
These are complex issues that should be addressed early, and therefore we strongly recommend you seek expert advice from the outset.
We’re here to help on any family law matters. Contact us to discuss your particular circumstances: