Yes, says guest blogger Megan Saksida of Meganomics, but HMRC may not consider you separated for tax purposes. This is because it depends whether there is –
- a Court order
- a deed of separation
- an intention on the part of both of you to separate – that’s a total separation, not something that is on/off.
In Benford v HMRC (2011) the couple said their separation was permanent. But they were so amicable that after a year he moved back home because she was expecting their baby. Not sure about the legal status of your separation? Speak to an expert family lawyer.
Why is the date of separation important
The way you are taxed before and after separation is different. This goes for both capital gains tax and income tax.
Are there tax advantages to staying together
Yes, there are. These are what you stand to lose –
- married couples allowance
- transferable allowance for married couples
- treatment of joint asset income
- capital gains tax exemption
Are there tax advantages to splitting up
Yes, if one of you is a high earner because high income child benefit charge only applies if you’re married, in a civil partnership, or living together as such.
The married couples allowance
This is £8,695 if you’re together for the full tax year. It’s reduced in the year of marriage or civil partnership but is available in full in the year of separation. This allowance is given to the higher earner of the couple if one of you was born before 6 April 1935.
If you separate – How will this affect married couples allowance? It’s still available in the year of separation. And if you reconcile it’s available for the tax year of reconciliation on a pro rata basis.
The transferable allowance for married couples
Do you both pay basic rate tax? Are you married or in a civil partnership for all of the tax year? If so, one of you can decide to donate ten percent of their personal allowance to the other. A good idea if one of you isn’t using up all their personal allowance. Note: it doesn’t increase the personal allowance of the other but reduces their tax liability by 20 percent of the personal allowance transferred – £238 in 2018/2019.
If you separate – How will this affect the transferable allowance for married couples? It’s given in full in both the year of the marriage and the year of the separation. It will cease the tax year after the divorce unless the donating spouse withdraws the transfer earlier.
Treatment of joint asset income
Do you own a “buy to let”? HMRC sees you as equally entitled to the income even if you own the property in unequal shares. You can tell HMRC you want to go for unequal shares of income. But this means your ownership of the property will have to be unequal too. This only applies whilst you are living together.
If you separate – How will this affect treatment of joint asset income? Instead of HMRC taxing you on equal shares of income irrespective of your actual share of ownership of the property, tax will now apply depending on your actual share.
High income child benefit charge
If either of you earn a “net adjusted income” of over £50,000, HMRC claws back one percent of child benefit for every £100 you earn over £50,000. This doesn’t just apply to married couples and those in civil partnerships but to those who live together as such too.
If you separate – How will this affect high income child benefit charge? If you opted not to receive the benefit because the salary of the other was above the minimum even though your own income wasn’t, you may wish to reinstate the benefit once the separation is permanent.
Capital gains tax exemption
Transfers between spouses and civil partners are treated as being made on a “no gain no loss” basis which means no tax is due. Any asset gifted between them keeps its original cost. It’s only when the recipient sells the asset to someone else that there is a chargeable gain or loss.
If you separate – How will this affect capital gains tax exemption? The exemption for gifts between you can be used until the end of the tax year (5 April) of the year of separation. Of course, these transfers only save CGT for the donor spouse. Whereas the donee spouse will eventually have all the gain over both the donor’s and the donee’s period of ownership if the asset is sold. Negotiations for a financial settlement should take into account the impact of CGT in this situation.
After the tax year of the separation is over you will be treated as connected parties and any transfers will be deemed by HMRC to have been made at market value. For example, Andy and Dave split up. They reach a financial settlement in their divorce after the tax year of separation. Andy owns the holiday home in Devon in his sole name. He agrees to give it to Dave. Andy will be liable to CGT as, for tax purposes, the Devon holiday home will be regarded as having been transferred to Dave at market value. This is even if no cash changes hands. If the holiday home has increased in value during Andy’s ownership more than the annual exemption available to him in the year of the disposal he will be liable to CGT at either 18 or 28 percent depending on his income tax level.
After the divorce goes through the couple are no longer connected parties. But take care, they may still be connected parties for another reason. Are they both partners of a partnership? Or is one the trustee of a trust the other set up?
Does splitting up affect tax in the UK
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The topics covered in this blog post Does splitting up affect tax in the UK are complex. They are provided for general guidance only. If any of the circumstances mentioned in this blog apply to you, seek expert legal advice.