Medium Tax Risk Situations on Divorce

Tax On Divorce » January 14, 2022

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

Our next newsletter will cover the high tax risk scenarios.

We hope that these are helpful prompts when hearing about client situations.

Issue  Absent from the former matrimonial home
Risk  1, If the individual has been out of the home for more than nine months they will likely have a CGT liability on sale or transfer.
2. The CGT liability is payable within 60 days.  
Advice required  1. CGT liability on transfer can likely be mitigated, seek advice as to whether s.225b relief will apply.
2. Seek advice as to whether other mitigation may apply on sale (usually not likely).  
Issue  Multiple investment properties
Risk1. Where there is no official company structure it can be difficult to ascertain how the properties have been held (ie sole traders, partnerships).
2. The tax treatment for property sales or transfers are also different depending on whether the individual has been running a property trading or property investment company.  
Advice required1. If required, seek advice as to how to the nature and structure of the property business.
2. Advice on the CGT liability on sale of transfer of the properties.
3. In some cases rollover relief can reduce the tax liability on transfer, seek advice if this applies.  
Issue  Transfers taking place after the tax year of separation
Risk1. When married couples transfer assets to each other the transfers are covered under the ‘no gain no loss’ principal, meaning that there is no CGT liability on transfer (the gain rolls over to the transferee).  This treatment only continues until the end of the tax year of separation.
2. Transfers that take place after the tax year of separation will be subject to CGT (if the asset has increased in value since the date of purchase).
3. The tax charge will often be a dry charge and if the charge relates to property it will be payable within 60 days.
Advice required  1. Seek advice to quantify the potential liability.
2. If properties are being transferred, consider if rollover relief is available on the transfer.
IssueOverseas assets being sold or transferred
Risk1. The country where the individual is resident and the country where the asset is based will likely both seek to tax the gain.
2. Often the double taxation treaty will determine which country has the primary taxing rights over the gain. However, changes from Brexit have meant many changes for the treatment of non-EU residents on the tax and social security payments.
3. Where the double taxation treaty is unclear, the foreign tax credit system is in place to limit double taxation.
4. The UK tax year does not align with other countries so timing issues can create difficulties when trying to claim foreign tax credits.  
Advice required1. Advice will be needed in the country where the individual is resident and the country where the asset is based.
2. If the double taxation treaty does not apply, then the individual will end up paying the highest rate of tax.
3. Seek advice to quantify the final tax liability.  
IssueRSUs/Stock Options/ Employee share schemes
Risk1. Approved share schemes are tax advantaged schemes and they have a different treatment on vest and sale.
2. Some plans have no tax on sale whilst others will be charged to income tax on sale.  The varying tax treatments can create uncertainty on the future actual tax payable.
3. Valuing shares in the future is, of course, a difficult exercise.  However, if the eventual sale will result in the individual receiving 100% of the sale price or 55%, will likely have an impact, especially if the shares are a large part of the wealth.  
Advice required1. Tax payable on the vest of the shares.
2. Tax payable on the future sale of the shares.  

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