New Year to bring divorce and tax questions

The tax consequences of divorce should be high on any married couple's list of considerations when thinking about divorce in the New Year, according to a tax expert.

Helen Adams, director of BDO Tax Dispute Resolutions, said: "As the clock strikes midnight on New Year's Eve, many people will assess how life is going, including looking at their relationships with January notorious, more so than any other month, as the time when many couples file for divorce. Divorce, by its very nature, is always a difficult and emotional journey.

"While children and money are high on both parties' agendas, tax is also an important consideration and there are numerous tax issues that may affect each party's wealth before and after separation and divorce."

The New Year is expected to lead to a rise in the rate of divorces as many married couples crumble under the strain of organising Christmas festivities, as well as the lure and prospect of a new beginning.

In January 2014, law firms across the country reported that they had 50 per cent more initial appointments with new and existing clients about divorce.

Five considerations

Adams provided a list of five key areas which couples should consider:

• The first step in a separation is to calculate the value of net assets held by each party. The resulting net assets are then divided between the parties. Assets such as property or shares in family companies may need specialist valuations.

• Both spouses should consider whether they will need to file UK (or overseas) tax returns depending on the income and gains they have after their divorce.

• Look at the assets both want to have after the divorce including cash, shares or property. If cash is desired but other assets are given then advice is needed to quantify Capital Gains Tax payable after the assets' sale to generate the cash as they will only be left with the net amount. It may be easier or better to negotiate to receive cash or assets of a higher value to mitigate tax payable on sale.

• If maintenance is payable to a spouse or for the children after the divorce, the tax consequences should be checked, especially if the order is made by a foreign court.

• Pensions and life assurance policies are complicated and we are in a period of changing pension rules. Tax and investment advice should be sought if they are affected by a divorce.

She concluded: "Overall, separation and divorce often has many tax consequences. UK tax rules are complex so it is important to seek advice early on all aspects of your affairs and the assets which you may receive as part of the divorce in order to avoid or mitigate unintended tax bills."

Binyamin Ali is assistant editor of Private Client Adviser