Relationship status: it’s complicated

Vanessa Lee, Tax Partner at accountancy and business advisory firm BDO, here looks at why tax issues are an important factor for couples impacted by separation and divorce.

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It’s unsurprising that lockdown has resulted in a significant increase in divorce enquiries, with research showing a 42% increase compared to last year.

For those impacted, separation and divorce are immensely emotional times and, whilst tax issues may not seem a priority, they’re an extremely important factor.

Currently, married couples and civil partnerships can only transfer assets between each other, without incurring tax exposure, in the tax year of separation.

For those currently considering proceedings, and who ‘separated’ during lockdown and since the start of this tax year, they will only have until 5 April 2021 to take action.

The marital home is often the key capital asset in divorce proceedings, but with the housing market in a state of flux, realising this asset may be protracted.

Recent changes to the Principal Private Residence relief, which allows the sale or transfer of the family home to be exempt from Capital Gains Tax, are key.

Under the changes, the post-occupation exempt period was reduced to only nine months, which places added pressure on couples considering proceedings. For the party who has left the property, but still retains an interest, they may also face a 3% Stamp Duty Land Tax surcharge on the purchase of a new property and future Capital Gains Tax exposure once they receive a share of the sale proceeds.

The rapid change in personal finances is also making settlements more challenging.

Where there are private company shareholdings, determining an appropriate valuation methodology requires careful consideration.

Due to COVID-19, those couples who’ve already concluded financial settlements may be able to revisit them, particularly if personal circumstances have materially changed.

In addition, couples with previously agreed post-nuptial agreements, or those who’ve entered into a pre-nuptial agreement, but have had their wedding postponed, should also seek advice.

Personal issues are absolutely immediate, but proactively addressing the wider financial considerations can help to mitigate significant tax implications, which is ultimately beneficial for both parties.

* Vanessa Lee is Tax Partner at BDO. She leads the Private Client Tax team across the North and the firm’s UK matrimonial team, email her at [email protected] or call 07796135824

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