Tax And Divorce – Whether UK Or Non UK Resident, You Need To Consider Income Tax, Capital Gains Tax and Inheritance Tax Liability
“The impact of tax on divorce can be critical, especially for international families. It’s vital to take expert advice from an accountant when considering a financial settlement. I’ve set out the main points to consider in this blog, and a brief Summary at the end,” says guest blogger Megan Saksida, Chartered Accountant, of Meganomics and lecturer and writer on private client taxes.
Divorcing? There are likely to be tax implications. But firstly, where do you both live?
How long have you been non resident? Do either of you intend to return to the UK? All these questions have tax consequences.
An expat who doesn’t work may find on a “day count” basis he or she is tax resident in the UK despite living elsewhere in Europe. This could be because you go back and forth to the UK.
And did you know you can be resident for tax purposes in more than one country? It could be necessary to consider the Double Tax Treaty to determine which residence takes precedence.
How does Non-Resident Capital Gains Tax (“NRGCT”) apply to your residential property in the UK on divorce?
Residential property is usually the major asset in a divorce settlement. For both resident and non resident tax payers there can be tax implications.
“NRGCT” is charged on gains accruing on disposal of UK property if it is not exempt under main residence rules (see below), and you are not resident in the UK in the tax year in which the transfer occurs.
Please note – the NRCGT rules take precedence over the temporary non-residence rules (see below).
What are the tax rates? Eighteen and twenty eight percent (depending on your personal circumstances), and only gains made since 6 April 2015 are taxed.
There are three methods for calculating NRCGT gains:
- The default method, which applies unless you elect otherwise. This uses the market value as at 6 April 2015;
- Apportionment of the whole of the gain/loss over the time the property was owned;
- The whole gain or loss (which is only advantageous for a loss).
Can UK property be elected as a non-resident couple’s main residence in order to reduce tax on divorce?
Yes, you can make an irrevocable main residence notification on the NRCGT Return. This can apply retrospectively to any period of prior ownership.
Is there an existing nomination? The nomination on the NRCGT Return is treated as superseding it.
Please remember it is essential both of you affirm this nomination to HMRC, irrespective of which party legally owns the property.
If only one of you owns the property you must submit a Return with a written notification from the other confirming agreement to the nomination. This is because the rules state a couple can only have one main residence between them.
What qualifies as ‘the main residence’ in order for the gain to be exempt?
The property needs to be occupied as your permanent residence.
If you are non resident, you will have an additional burden of proof which is the “day count” test. What’s the “day count” test? This is where you are present in the dwelling for at least ninety midnights in a year. And if your spouse or civil partner was in the property instead, this will count towards your total.
Do you have more than one UK residence? All stays at both dwellings count towards the ninety day test.
If the “day count” test is reached and the home is eligible for main residence relief, no chargeable gain arises for UK tax purposes irrespective of your country of residence at the time of the divorce.
But be warned – your tax position in your country of residence also needs to be considered.
Is the former main residence for CGT purposes still owned by either of you? What’s the significance of the 18 months rule?
If the property was your former main residence for CGT and it continues to be owned by either you or your ex more than eighteen months after the other leaves the property, then tax may be payable when the property is sold.
This means the leaving spouse should take tax advice if you continue to own the former marital home even though you no longer live there.
Don’t forget the NRCGT time limits
An important practical point to note is if you make a NRCGT disposal you must report the disposal to HMRC within thirty days. Tax on NRCGT gains is generally due thirty days after sale.
What about tax on divorce on everything other than residential property? What are the rules?
- UK residents are taxed on worldwide income and gains.
- Non UK residents are only taxed on income generated in the UK.
- Non UK residents are not taxed on capital gains unless they become “temporarily non resident” (see below), although the rules for gains on residences and businesses are different.
Are you resident, or non resident, in UK for tax purposes?
What is the test for residence?
It’s complicated but boils down to day counts, working hours, the availability of a home in the UK, or your personal ‘ties’ to the UK.
How does this apply in practice?
I’ll give you an example. Say if you live in France, own a home in the UK, and don’t work. Your minor children are at a boarding school in the UK and you spend the school holidays with them in the UK. For tax purposes you might be defined as resident in the UK. How is this relevant to divorce? You could be liable in the UK for your worldwide income and gains under the terms of your financial settlement.
During the marriage you may have been non UK resident for tax purposes, but you now wish to return to live in the UK. What does this mean for tax on divorce?
It depends how long you have been out of the UK and a non UK tax resident, and when the marital assets are sold or transferred.
Are you “Temporarily Non-Resident”?
A non UK tax resident living outside the UK is not taxed on their capital gains unless they are deemed “temporarily non-resident”. This happens when you live outside the UK for less than five years, and you were a UK tax resident for at least four of the previous seven tax years prior to leaving.
If this applies to you, any capital gains made while living outside the UK, on assets held before you departed the UK would become chargeable in the year of your return to the UK. This means even if there was no initial liability to CGT because you were non resident for tax purposes, the charge would now apply.
What is the significance of the date of separation on tax on divorce?
A trial separation is not relevant, but permanent separation is relevant for both income tax and capital gains tax.
But when is a couple officially separated? For both income tax and CGT there are three possibilities:
- There’s a Court order;
- You have a Deed of Separation;
- You are separated in circumstances in which the separation is likely to be permanent.
The third option depends on your individual circumstances. You will need to provide evidence to show when the decision was made to separate permanently, and it’s not necessarily the date one of you left the marital home.
Sometimes a decision may be made by one partner and not communicated to the other.
The date is crucial, especially for CGT.
What happens when matrimonial assets are distributed in the same year as the permanent separation in the case of a UK resident?
First of all, income –
Both of you are taxed independently on income earned in the UK, and worldwide, and you have your own personal allowance.
It may be during your marriage you decided to share income from assets unequally to maximise tax efficiency. But on divorce the Court has wide powers to divide assets irrespective of ownership. The assets can be split equally or in other ways.
Please note – any prior declaration of beneficial interest to HMRC ceases to have effect after permanent separation, and you will be taxed according to your actual beneficial ownership.
Secondly, capital –
In the case of CGT, if you transfer assets to each other under the financial settlement in the tax year of the permanent separation, this is on a “no gain, no loss” basis, just the same as during the marriage.
But there’s a rule – you must have lived together at some point during the tax year.
Assets are distributed in a tax year after permanent separation, but before divorce. What are the implications for tax on divorce for a UK resident?
In the case of CGT, if assets are exchanged in a tax year during which you are not living together, but before decree absolute (which brings your marriage to an end), it’s bad news.
This is because the assets will be deemed to be transferred at market value, and CGT could be payable. This is the case even if no money has been exchanged.
What happens if a non UK resident permanently separates in the same year as the assets are distributed?
You are not liable for CGT for any capital disposals in the divorce settlement except residential property (see above) and business assets.
Even if you return to the UK during or after the divorce, the rules for “temporary non-residence” are not relevant, as the transaction is excluded under the “no gain, no loss” rules.
What is the liability of a non UK resident when assets are distributed in a tax year after permanent separation, but before divorce?
Any assets transferred in a tax year during which you are not living together, but before the decree absolute, would not be subject to CGT if you are non UK resident (except for residential property).
But there could be a tax charge in the country in which you live, and local tax advice should be sought.
If you choose to return to the UK and are rendered “temporarily non-resident” (see above) CGT could be chargeable.
What about Inheritance Tax?
Liability to Inheritance tax depends on the date of the decree absolute. Before, transfers on divorce are not chargeable. After, they are only chargeable if there is intent to confer gratuitous benefit.
But be careful if one of you is domiciled UK and the other not. There are restrictions on how much can be transferred and tax advice must be taken.
What about your, or your ex’s, unused IHT nil rate band?
If one of you dies after divorce and hasn’t remarried any unused nil rate band will remain unused.
Maintenance to children and former spouses, and gifts to children. Liable to IHT?
Maintenance to children and former spouses is exempt from IHT, but gifts to children not for their education, maintenance or training, could be chargeable if not habitual, and out of income. It’s best to take tax advice in these circumstances.
Always consult an accountant
Whether you live in the UK or elsewhere, always consider your potential liability to tax on divorce. Consult an accountant.
Even if you don’t live in the UK, you can be liable to CGT on the sale or transfer of UK residential property
Can you claim exemption under main residence relief?
Beware the 18 month rule …
Beware of either or both of you retaining a property, nominated as a main residence, for eighteen months after divorce – you can find yourself with an unexpected CGT liability.
… or being deemed a UK resident …
Even if you don’t habitually live in the UK, the Statutory Residence Test legislation may consider you do for tax purposes. You could end up being liable to pay CGT on the sale or transfer of assets in the UK and elsewhere.
… or temporarily non resident
Think you are excluded from CGT liability because you were non resident for UK tax purposes? If you return to the UK you may become liable because HMRC may consider you were only “temporarily non resident”.
Liable to pay tax in more than one country?
The Double Tax Treaty is helpful on this point.
WARNING – date of separation and date of divorce
The date of permanent separation, and the date of the decree absolute (which brings your marriage to an end), are crucial when considering liability to CGT. Whether you live in the UK or elsewhere, you might find yourself with an unexpected tax bill. You need to consult an expert family law solicitor to navigate these tricky points.
And Inheritance Tax?
Divorce can have consequences for Inheritance Tax liability.
Visit our website just-family-law.com
The topics covered in this blog post are complex and are provided for general guidance only. If any of the circumstances mentioned in this blog might have application to you, you should seek expert legal advice.Read the article