Do I have to pay taxes on a divorce settlement?

It’s a fact that there is a spike in divorce rates early in the New Year.

Whether that’s because people come to terms with reality after a joyless Christmas or because they hadn’t wanted to ‘spoil’ the holiday season, they waited until afterwards to pass on the bad news.

Either way, it’s a huge change for any individual and the way they live, so the last thing you need is a surprise tax bill on your settlement or the stress that can bring.

To be absolutely clear when it comes to taxes in divorce settlements, you should speak to a financial adviser as soon as possible.

Here are some of the key areas many people need to consider –

Taxes on spousal maintenance and child support

If you receive child or spousal maintenance from your former partner, you do not have to pay any income tax on the payments.

If you are the person making the payments, you also will not face a tax charge, because you will be paying out of your pocket after having paid income tax – you will not be taxed twice.

In addition, you cannot benefit from any tax relief on these maintenance payments to reduce your income tax, except where all the following apply:

  • either you or your ex-spouse were born before 6 April 1935
  • you are paying court-ordered maintenance following the end of a divorce
  • the payments are for your former spouse as they have not remarried or for any of your children under the age of 21.

Known as maintenance payments relief, the scheme allows you to claim up to 10% of £3,530 of the maintenance you pay – so up to £353 a year.

https://www.gov.uk/income-tax-reliefs/maintenance-payments-tax-relief

Taxes on assets, land and property following divorce

You do not usually have to pay capital gains tax if you give an asset to your spouse before you finalise a divorce.

If you transfer an asset after you are separated but did not live together at any point in the tax year it was transferred, you may have to pay capital gains tax. The same is true after you’ve divorced.

In this case you will need to get a valuation of the asset on the date of transfer and use it to work out the gain or loss.

However, if you are separated but lived together at any point during the tax year of the transfer, HMRC will treat you as spouses for tax purposes, in which case different rules apply.

If you transfer an interest in land or property to your partner as a result of a divorce settlement, you will not have to pay stamp duty land tax.

This is also the case if partners annul their marriage or legally separate.

https://www.gov.uk/money-property-when-relationship-ends/tax

Can you reduce your tax bill in a divorce settlement?

Depending on your circumstances, you may be able to reduce your tax liability in a divorce settlement due to capital gains tax rules as illustrated above. However, we would recommend seeking professional advice to clarify your own individual situation.

If you need any more information, reach out to us to discuss your tax liability. Please email info@thomsoncooper.com.

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22 Stafford Street, Edinburgh – 0131 226 2233

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