There is no general tax exemption on divorce, although there are some specific reliefs available.
Maintenance between ex-spouses is always tax free for the recipient, but no tax relief is given to the payer unless either spouse was born before 1935.
Transfers of assets between spouses take place at no gain, no loss for capital gains tax purposes. When a couple are still legally married, but separated, the no gain no loss rule for transfers between spouses only applies until the end of the tax year of separation.
However, a couple remain ‘connected’ for tax purposes until the date of the decree absolute, meaning that transfers are deemed to take place at market value, potentially creating a capital gains tax liability even on gifts. Meanwhile, losses on assets transferred to a connected person can only be set against gains on transfers to the same person.
Following the decree absolute, transfers take place in return for the actual consideration received, provided they are made at arm’s length, and losses can be used against gains on any other disposals.
If the main residence is sold, or transferred to the remaining spouse, within 18 months of moving out, gains will be covered by main residence relief.
If it is transferred more than 18 months after moving out, a specific relief means the house can be treated as if it was still the departed spouse’s main residence, provided it is transferred as part of the separation arrangements, the transferee spouse still occupies it as their main residence, and the transferor has not in the meantime elected for another house to be their main residence.
As a person can only have one main residence at a time, claiming this relief means that any new house will not be covered by the main residence relief until the date the old house is transferred to the former spouse.
Mesher v Mesher orders
A court orders that the sale of the property is postponed until the youngest child reaches 18, with one spouse remaining in the property until then. A Mesher order creates a trust for tax purposes, with the husband and wife deemed to dispose of the property to themselves as trustees. The disposal takes place at market value for capital gains tax purposes, but provided the transfer is within 18 months of the departing spouse leaving, gains should be covered by main residence relief.
There should be no inheritance tax charges on creation of the trust due to the spousal exemption, or due to relief given when there is no transfer of value or a transfer for the maintenance of a former spouse or a child.
Alternatively, a court may make a deferred charge order, whereby the departing spouse disposes of their share in the property in return for a charge to be paid at a future date. This creates a disposal for capital gains tax at the date the charge is created, which would normally be covered by main residence relief. There is another disposal when the deferred payment is received, which is a disposal of the right to receive payment. No main residence relief would be available on this disposal.
When business assets are being transferred on divorce, gift relief may be available if the conditions are met and the transfer is made under a court order.
If the transfer is not made under a court order, HMRC’s view is that it is not a gift, but rather a transfer made in return for the other party surrendering rights of the same value.
If the transfer is made as a result of a court order, it is seen as not being a bargain between the parties, as the court has decided the terms rather than the parties themselves.
If a number of properties are owned jointly, there is a relief given where ownership is transferred so that the co-owners each become sole owners of individual properties. Capital gains are rolled into the base cost of the new holdings rather than being charged at the time of the transfer.
Transfers between spouses on divorce are exempt from Stamp Duty Land Tax.