High Tax Risk Situations on Divorce

Tax On Divorce » January 28, 2022

As we head into the New Year, we wanted to pull together a quick reference for family law professionals on situations that we would deem high risk from a tax perspective.

Our last newsletter covered the medium tax risk scenarios (you can view this feature here). We hope that these are helpful prompts when hearing about client situations.

Issue  Involvement in tax avoidance or tax saving schemes
Risk  1. This could involve investments from as far back as the 90s.

2. The amount of tax and penalties could have a significant impact on total wealth

3. .Many of these schemes are still making their way through the courts and appeals process so it is difficult to ascertain potential liabilities.  
Advice required  1. SJE report as to the potential amount of tax and liabilities due.

2. In the interest of certainty, an offer could be made to HMRC to settle any potential/outstanding liabilities.  
Issue  Undisclosed income/gains/assets overseas
Risk1. Penalties of up to 200% on income/gains not disclosed pre 2016-17.

2. Enquiries can go back 20 years.

3. The total liability will include tax, penalties and interest.Criminal proceedings may commence.  
Advice required1. SJE report as to the potential amount of tax and liabilities due.

2. Could consider making a disclosure to HMRC, this would quantify the unknown liabilities and prevent future enquiries into the same income/gains.  
Issue  Under current HMRC enquiry
Risk1. The total tax liability will be unknown.

2. If HMRC determine that the error was deliberate they can open investigations going back 20 years.

3. The enquiry process can be drawn out and it can take time to reach a conclusion.

4. The potential of taking the case to tax tribunal is present and that would create even further delays.  
Advice required  1. SJE tax advice on the likely outcome of the enquiry, or if not the likely outcome, what amount of tax and penalties payable would enable the enquiry to close.

2. If the client is considering taking the case to the tax courts, QC advice should be sought as to the likely success of the case.  
IssueCash Extraction from a company  
Risk1. If one party needs to extract cash from their company, there are several ways they could do this. Each withdrawal method will attract a different rate of tax and the structure of the company will also determine which options are available.

2. The cash can be withdrawn as a dividend – top rate of tax 38.1%. This is usually the quickest option but suffers the highest rate of tax.

3. If the company is sold, the gain on sale would attract capital gains tax.

4. If the company is wound up, the shareholders can extract the cash in the company as capital. This withdrawal would be taxed at 20% (possibly 10% if Business Asset Disposal Relief applies)

5. .Company purchase of own shares – there is no tax liability for the company, the person being paid for the shares will likely have a capital gains tax liability on the purchase of the shares.  
Advice required1. A valuation report should be sought and the business owner(s) will need to provide up to date statements of the amount of cash available in the company.

2. Once the above is completed, a tax report should be sought on the amount of tax payable in any of the above scenarios which are feasible.

3. If it is not known which options are available (due to company Articles of Association), seek an initial review report.  

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