Full and in-depth structure and notes on financial orders and more A highly detailed and clearly written step-by-step approach to understanding and answering exam questions. The document breaks down each element you need to cover to answer a question on financial orders. Contains extensive but eas...
Income tax There are four ways maintenance can be paid:
1. Pure voluntary agreement (usually a short term resolution)
2. Written agreement
3. By court order
4. In compliance with maintenance calculation by CMS
There is:
No tax relief on maintenance payments – maintenance is tax free for the recipient.
There is no married couple or single parent allowance
No tax relief on mortgage interest payments
Married couples are allowed to transfer a small amount of their unused personal allowance (£1,260) for tax
saving purposes.
This ability to make the transfer will cease at the end if the tax year where separation occurred.
Inheritance Transfers of assets or money between spouses or marriage breakdown have the potential to give rise to a
tax charge of inheritance tax as lifetime transfers. There are a number of relief and exemptions
1. The spousal exemption under section 18 of the inheritance Tax Act. The spouse exemption exempts
transfers between the parties before decree absolute even if they have been separated. However this
exemption rarely applies since lump sum property adjustment orders are not effective until a decree
absolute is obtained.
2. Dispositions for family maintenance under section 11 of the inheritance Tax Act. A disposition is not
transfer value if made by one spouse for the maintenance of the other spouse or of their child. This
applies both before and after divorce.
3. Dispositions without donative intent under s10 – a disposition in not a transfer of value if it was not
intended to confer a gratuitous benefit and that either
a. It was made in a transaction at arms length between unconnected persons or
b. It was such as might be expected to be made in such a transaction.
Capital gains On marriage breakdown capital assets commonly have to be sold or divided between the spouses and this may
tax give rise to a chargeable gain.
Transfer of assets between spouses are deemed to have occurred at a consideration that gives rise to neither
again or a loss.
However the benefit of this rule is lost at the end of the tax year where separation occurs.
Even when the rule applies there may still be a tax implication for the recipient - Themed to have acquired the
asset at the same value as the transferring spouse. As a result when the recipient eventually dispose of the asset
they will be taxed on the transferors game as well as their own
‘X’ bought a flat for £200,000. When ‘x’ divorced ‘y’ the flat was worth £250,000. As the flat is transferred to
‘y’ in the tax year where separation occurred it is deemed to be transferred at the same value the transferring
spouse (x) acquired it (meaning there is not gain or loss- view it as £200,000) meaning there is no CGT. Later,
‘y’ sells the flat for £275,000. While the flat has technically increased in ownership while ‘y’ owned it to the
extent of £25,000, as ‘y’ is deemed to have been transferred the flat to them at £200,000, ‘y’ has made a gain
of £75,000
CGT and the home:
The transfer of the home or a share of it too the occupying spouse could potentially give rise to a capital gain tax
liability. However, liability may be avoided with two exemptions:
1. The private residence exemption: To qualify an individual must have occupied the home as their only or
main residence throughput the period of ownership. If they have only occupied it for part of their
ownership the relief will be proportionately reduced a set that they are deemed to have occupied during
the last nine months of ownership whether or not this is in fact so.
, Financial remedies and provisions information:
2. Taxation of chargeable gains act section 225B:
a. A husband and wife separate slash divorce and one of them moves out of the home whilst the
other continues to live there
b. Under the subsequent financial settlement the non occupying spouse transfers the home or an
interest in it to the occupying spouse and
c. The non occupying spouse has not elected to treat another property as his own or main residence.
If these conditions offer filled the non occupying spouse will be treated as having continued to occupy so that
they gain will be exempt.
Sale of home to a third party
If the sale is made within nine months of the separation any gain is exempt being covered by the private
residence exemption. If the sale is later the proportion of the occupying spouses gain not covered by the
exemption may be taxable. The annual exemption can be applied to reduce the gain if it is available. The spouse
whose continued to occupy will be covered by the private residence exemption.
Transfer of home between spouses
Outright transfer or deferred trust of land or deferred charge.
The transfer is capital gain liability may be exempt under the following rules:
1. The rule relating to inter spouse disposal: Whether transfer takes place in the tax year where separation
occurs
2. The deemed occupation rule: Whether transfer takes place within nine months of the separation
3. Or section 225B of the taxation of chargeable gains act (If later)
When of the above applies it’s probably because the transferor have made an election in respect of another
home and the separation exceeds three years. In this case the game will be taxable. A proportion of the gain will
be exempt due to the private residence exemption and the annual exemption may help reduce the liability.
Further sale of home subject to a deferred trust of land or deferred charge
One spouse may be required to transfer some or all of their interest in the home. In these cases the capital gains
consequences are the same as above.
However when the house eventually becomes to be sold a further capital gains tax liability may arise.
The occupying spouses game will be exempt under the private residence exemption. For the non occupying
spouse it will depend on whether the home was subject to a deferred trust of land or deferred charge.
Deferred trust of land- As the court order has created a settlement the non occupied spouse will avoid
capital gains tax liability completely because of rules exempting gains on property occupied by a
beneficiary entitled to do so under a settlement – s225B.
Deferred charge- While the charge is expressed as a proportion of the proceeds for example 1/3, the
value of that share may have increased by the time the property is sold. The non occupier is likely to be
liable to a capital gains tax liability. The annual exemption may help reduce the bill. However if the
deferred charge is for a fixed sum there is no charge for capital gains tax when the debt is paid – s251.
Other assets:
Gains will occur on many disposals of matrimonial assets- To raise a lump sum or on the transfer of property
for example of shares.
Exemption or relief are available. The following should be considered
Wasting assets for example the family car or electrical items
Tangible movable property disposed of for consideration of less than 6000 pounds
The annual exemption
The rule relating to inter spouse transfers
Tips for the solicitor
There is merit in arranging a financial settlement so as to enable assets to be transferred between spouses
before the tax year of separation expires. Or structural financial settlement to stagger the disposal of assets
across 2 tax years so the transferor has advantage of two annual exemptions.
NOTE: Property transferred under a separation agreement or court order under divorce – Conveyance is
exempt from stamp duty land tax.
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