Separation - Making Divorce Less Taxing!

Life as we knew it has undoubtedly changed over the last six months. Our family lives, social lives and working lives have been significantly impacted by the global pandemic. Life in lockdown has left many couples considering their futures apart.

Marriage breakdowns are personally and financially difficult. With our local Court system operating remotely and with an inevitable backlog of cases, many couples are considering alternatives to the Court arena to formally separate and move on with their lives. Consideration should be given to a Matrimonial Agreement (written agreement between spouses) which usually resolves all financial and property issues without recourse to the Court.

A Matrimonial Agreement (or Separation Agreement) is a written agreement between spouses, which resolves issues such as occupation and ownership of the home, division of investment properties, savings, pensions, inheritances and future claims against the other’s estate.

Aside from saving on costs and acrimony, Matrimonial Agreements have many other advantages and may contain more detail than a Court Order. The parties retain control of their financial affairs rather than handing it over to a Judge; it avoids publicity and can be entered into discreetly in the privacy of the solicitors’ office.

Matrimonial Agreements are also beneficial in acknowledging that the relationship has in fact ended and allow one party to move out of the matrimonial home without the fear that they may be accused of desertion.

To ensure a Matrimonial Agreement is valid and binding the parties should each obtain independent legal advice, which is stated in a clause within the Agreement. Whilst the Agreement is a contractual agreement between spouses, the only way it can be enforced is through the Matrimonial Courts. It is advisable to have your Agreement made into an Order of the Court which can be done easily at a later stage on the hearing of a divorce. The Agreement itself can include a clause dealing with how, when and on what ground a divorce may subsequently be issued and how the costs will be divided.  

There can be important tax advantages as well which include securing CGT exemptions on transfers of property between spouses before the end of the tax year in which they have separated.  

How Separation affects Stamp Duty Land Tax (SDLT)

  • New SDLT rules were introduced on 1st April 2016. Where someone is purchasing an additional property, a higher rate of SDLT will apply (a surcharge of 3% above the current rates)
  • Where a couple own a property jointly but are separated or divorced and either party then purchases a new home to live in, without removing their name from the deeds of the matrimonial home (which is being retained), this will be counted as an additional property and the 3% additional rate will initially apply.
  • Married couples and civil partners who separate in circumstances that are likely to be permanent will not have to pay the higher rates of Stamp Duty (a surcharge of 3% above the current rates) when one of them buys a new home before the family home has been sold/transferred. In this instance, there must be either a matrimonial agreement; Court Order or a permanent desire to separate.
  • If the share of the marital home is sold within 36 months of completing a purchase of a new property a full refund of the difference paid in higher rate SDLT should be available from HMRC.

How Separation affects Capital Gains Tax (CGT)

  • Capital Gains Tax (CGT) is a tax on the gain or “profit” when you dispose of an asset that has increased in value. Transfers between family members are deemed to be at market value and the tax is on the gain arising , not the amount of money (if any) received.
  • Transfers made between spouses or civil partners are ordinarily on a “no gain/no loss” basis which does not give rise to a chargeable gain upon which CGT may otherwise be payable . A spouse or civil partner can transfer assets to the other spouse or civil partner and not pay any CGT if they can prove they lived together during the tax year in question and have not separated.
  • Transfers between separated spouses or civil partners, particularly for assets other than the main residence such as holiday homes or investments , may however give rise to chargeable gains even though there has not yet been a divorce. This is particularly relevant where couples separate and live apart for a considerable period, before a financial order or divorce is finalised.
  • If the couple has separated and the transfer of the asset occurs after the end of the tax year in which they separated, the transfer will not be on a “no gain/no loss basis” and may give rise to a chargeable gain which is liable to CGT.
  • Disposal of the main residence does not usually trigger CGT due to the Principal Private Residence (PPR) relief. If the property had at some point been the main residence , the last 9 months of ownership qualifies for the PPR relief, as this is considered as deemed occupancy
  • If the property is sold more than 9 months after one of the spouses or civil partners has ceased to occupy the property as his or her main residence then this may give rise to a chargeable gain for that spouse or civil partner, the chargeable gain being his or her share of the gain on the property over the entire period of ownership, time apportioned by reference to the period of time when it was not his or her main residence
  • The spouse or civil partner will still have his or her annual exemption to use against the gain, if it has not been used against other gains, and will be able to use any allowable capital losses he or she may have
  • The spouses or civil partners cannot have more than one main residence between them for the purposes of the PPR relief at any time while they are living together but there is however a special relief or concession following separation, so that the main residence need not be the same for each spouse or civil partner for the purposes of the PPR relief
  • Where as part of a financial settlement on separation , divorce or dissolution, a spouse or civil partner who has ceased to occupy the main residence transfers his or her interest to the other spouse or civil partner more than 9 months after ceasing to occupy the property, it can still be treated as being the main residence of the transferring spouse or civil partner for the purposes of the PPR relief until the date of the transfer or, if earlier, until the spouse to whom the property is being transferred ceases to occupy the property as his or her main residence –the leaving spouse or civil partner will effectively still obtain the PPR relief for the period from his or her moving out to the point of transfer
  • However, PPR relief cannot be given for another property (except for the final 9 months of the matrimonial or civil partnership home) so this concession may not suit all cases, particularly if the leaving spouse or civil partner has purchased another main residence
  • The rules can have serious consequences for divorcing or separating couples, who may have to make the difficult decision to continue to live together after separation or pay a CGT liability that may impact the matrimonial finances.

There are many complexities to separation and property ownership without the added question of are we separated or simply living apart? Do we have a permanent desire to live apart? These issues should be carefully considered as part of any Matrimonial Agreement and we will work closely with individuals financial advisors to ensure all aspects of the couple’s finances and property issues are incorporated into a Matrimonial Agreement.

At Millar McCall Wylie our experienced Matrimonial and Residential Property Team work hand in hand to ensure that all of our clients get a full range of legal advice in relation to the many questions and concerns that arise during separation or marriage breakdown.

Please contact us on 028 90 200050 or email or