Divorce and Tax

When it comes to divorce you don’t immediately think of tax. After all it is reasonable to assume that separation and divorce should be one aspect of your life that is tax free. However, our Manchester divorce solicitors will tell you that divorce isn’t tax free. In this blog we look at divorce and tax.

Taxing divorce

When it comes to separation and divorce there are obvious and hidden tax consequences. For example:

• Child support – the parent that pays child support for the children will pay the child support out of their net income and the parent who receives the child support won’t pay income tax on the child support. It is important to factor in the net effect of child support payments when looking at issues such as mortgage capacity and affordability of mortgage payments or the likelihood of the court ordering spousal maintenance in addition to child support
• Spousal maintenance – if the court orders that spousal maintenance is payable then the spouse paying the spousal maintenance will pay it out of their net income and the spouse receiving the money won’t pay income tax on the spousal maintenance. If the receiving spouse did then it would be double taxation
• Pensions – if a couple agree to the making of a pension sharing order then it is important to look at the tax consequences of taking the cash out of the pension fund, if that is the plan. If the tax effects of withdrawing the money from the pension aren’t considered then one or both spouses may end up with a far smaller financial settlement than envisaged or paying too much tax than they would have done if they had taken expert financial and pension advice
• The family home – if the family home is going to be sold then it is important to factor in stamp duty costs on rehousing when looking at the housing needs of the husband and wife. If the family home is going to be retained in both spouses names until a future date then capital gains tax may be payable by one spouse when the property is eventually sold, for example, when the youngest child is age 18
• The sale or transfer of assets – if assets such as shares in a family business or an investment portfolio are sold or transferred then capital gains tax may be payable. There is the potential to avoid payment of capital gains tax if the transfer of assets takes place in the tax year of separation. That is why it is best to take early specialist legal and financial advice if you are a business owner getting divorced or you have other assets that may be liable to capital gains tax on sale or transfer, such as a buy to let property portfolio
• International tax- if a couple own property abroad, such as a second home, then there may be significant tax issues in the overseas country if the property is sold or transferred
• Tax issues on divorce – if a spouse makes allegations in financial court proceedings that their husband or wife has not declared income for tax purposes (and there is evidence to support this) or evidence of other tax irregularities (such as a sham trust) a family judge can order disclosure of the judgement to HMRC.

Divorce, tax and HMRC

It is accurate to say that some divorce and financial court proceedings can open up ‘’a can of worms’’ for a husband or wife when it comes to their tax affairs.

In a recent court case a judge said that the £12 million divorce financial court proceedings could potentially end up in a HMRC investigation, subject to the findings at the final hearing of the financial settlement case.

The case concerns a shipping business and a family home worth an estimated £4.5 million. The couple enjoyed a luxurious standard of living during their marriage but when the relationship broke down there was an acrimonious separation that led to financial court proceedings initiated by the wife.

A court of appeal judge, Lord Justice Males,  warned that should the wife establish her case against the husband then both could both be implicated in a ‘criminal conspiracy…to evade tax properly due’ on their earnings. The judge’s comments were made when the court heard an appeal to reinstate a freezing order injunction to prevent the husband from disposing of assets that the wife says are family assets and the husband says aren’t beneficially owned by him. The husband disputes ownership or any wrongdoing asserting that the multi-million shipping fleet were legitimately and properly transferred and thus there was no tax evasion and the ships or their value can’t form part of the financial settlement.

The court of appeal judge was clear that he made no findings but was equally transparent in saying that if a court at the final hearing of the financial settlement case concluded that the ships were not genuinely transferred to a third party this could potentially result in investigations by tax authorities.

Divorce, tax and legal advice

When it comes to divorce and tax, specialist Whitefield divorce solicitors work with expert accountants and financial advisors so that a divorcing husband and wife know where they stand both legally and financially and can make informed financial settlement decisions, understanding the tax implications of their divorce and financial settlement.

Our Manchester Divorce Solicitors

Whitefield, North Manchester and Holmes Chapel, Cheshire Evolve Family Law divorce experts cover all aspects of family law, divorce and financial settlements. To speak to a specialist Whitefield divorce solicitor call us or complete our online enquiry form. Appointments are available face to face, via video conferencing, Skype or by telephone appointment.