Nobody wants to pay tax on divorce. So how do you keep your tax bill down while coming to a sensible arrangement with your spouse?
Going through a marriage breakdown is hard enough without having to pay additional monies to HMRC. Your first concern may be property complications, but as a business owner you should pay attention to the additional tax implications where you and your spouse both own shares in your company and you wish to split the ownership on divorce.
From the date of your separation you only have until the end of that tax year to sort proceedings for the sale of shares. HMRC doesn’t wait around for the divorce to go through ; in their eyes you’re not considered married from the date of your separation, so it’s this date that has tax implications, not the date of your divorce. Discussions over the valuation of your company’s shares may take too long, meaning you over run in to the new tax year. Inevitably these shares will have gone up in value, meaning that either of you or your spouse could be left with a Capital Gains Tax liability. This liability may be factored in to your Financial Settlement, meaning both you will be paying the costs of delays to HMRC in the form of tax.
To avoid delays and additional tax bills, get proceedings moving as fast as you can with the transfer of shares before the end of the tax year in which you separate. Transferring shares between married spouses doesn’t trigger a Capital Gains Tax bill, so as long as the transfer occurs in the same tax year as your separation you shouldn’t be left with a large tax bill. This is down to the “no gain, no loss” rule – During this time HMRC sees the shares as only costing what your spouse will have originally paid for them, meaning there has been no Capital Gains Tax gain, or loss. But this only works if the transfer takes place in the same tax year as your separation.
So, although it might not seem like a reasonable thing to do at the time, overall you will be saving yourselves money, and avoiding one of HMRC’s tax traps! You can always argue the true cost of the shares at a later date and make any required payments separately.
Sometimes we are asked ‘when is the best time to separate’. The answer is as soon after 6th April as possible rather than closer to the end of the tax year. Sometimes it is possible to do this to leave more time for negotiations.
We’re experienced tax advisors , so if you need further advice on this topic please get in touch. Call us on: 01273 882200.
All details above were correct at the time of publishing - for more up to date information please get in touch.
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