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27 FEB 2017

Why 'no fault divorce' could help join the dots between divorce law and tax law

Why 'no fault divorce' could help join the dots between divorce law and tax law

It is now February 2017, and the current tax year will end on 5 April 2017. Isn't it gloomy in the world of politics? The combination of the outcome of Brexit and the fascination with the latest news on the Trump administration are enough to worry even the most optimistic of us.

Those things are happening ‘out there’. But what if your main concern is the final realisation that your marriage or civil partnership is definitely over?

Yet again, the government has said that it will not be putting forward a reform of divorce law to allow spouses (or civil partners) to apply for divorce within 2 years of separation, unless they are prepared to allege fault. For opposite sex couples, that means alleging either adultery or unreasonable behaviour. For same sex couples, the only fact to rely on is unreasonable behaviour. Since for most of us the fact of adultery is proof of unreasonable behaviour, essentially all married couples are in the same boat. Unlike much of the world, we insist that unhappy people concentrate on the past faults in the marriage. In February 2017, the Court of Appeal has been considering the refusal of a judge to allow a divorce to a woman who found her husband’s behaviour intolerable. If she loses, she now has to continue being married to him, living close by, and she can divorce 5 years after the separation. Only then can she get financial certainty.

It is said that January is the peak time of year for marriage breakdown. You may be thinking about divorce, talking to friends or perhaps trying counselling. Say you separate in early March 2017, and then plan to start your divorce in early March 2019. It is all rather difficult and you can barely cope with the sadness of the breakdown of your marriage, and perhaps you have to tell the children, your family and friends all of whom will find the news distressing. However, you want to wait and live apart for 2 years, as the breakdown was really a mutual decision based on your growing apart.

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But what is this? You go to see a family lawyer, and they say that if you have already separated, you must transfer assets between you within the next month (ie by 5 April 2017) if you are to continue to be treated as a married couple by HMRC, and be able to transfer assets between you without it counting as a disposal which would trigger an immediate liability to pay that Capital Gains Tax (CGT). Once you are officially separated, whether you are divorced or not, you will be treated as separate people. At most, you will only have one month to transfer those assets, or you risk paying the CGT now, rather than when the receiver disposes of the asset.

It is all ok as your main asset is your family home, and is that exempt from CGT? Well, only for the next 18 months from separation, for the person who moves out. After that, he/she loses what is known as principal private residence relief, PPR. Any gain after that date is taxable for the person who left.

The worst timetable is now running. You are separated, and trying to cope with all of the practical arrangements. Additionally, you will have to pay CGT if you don’t sort out the finances before 5 April 2017. You will also have to pay CGT on the gain on your share of the house unless you sort this asset out by September 2018. However, you don’t want to start the divorce until March 2019, as the bitterness and hostility means you know it is not wise to make lasting plans whilst you are upset.

What difference would no fault divorce make? You could start the divorce now, without blaming the other. We cannot change the calendar to say you have longer to negotiate over the transfer of those assets, but skilled mediators and family lawyers can work with you to help you to sort out the finances fully before the divorce is finalised, so you can then completely move on, as the divorce process usually takes about 6 months. A separation and divorce starting in April 2017 will lead to decree absolute in late autumn 2017. No one is to blame, you still have all those tax concessions at a time when your money is tight and you are funding two households where you used to fund one.

Until we have no fault divorce there are tax traps which cause more unhappiness and expense, when times are already hard.