The cost of divorce – how the pain can be more than emotional

January has earned the dubious distinction of being the month when more couples decide they want to get divorced than any other. The reasons are likely to be myriad, but the likelihood is that they either mark Christmas or New Year as a line in the sand for changing their lives, or simply that spending so much time together during the festive season helps them realise they are no longer compatible.

One law firm has seen an increase of 150% in divorce enquiries this January compared to the surrounding months, possibly boosted by the fact that couples can now have a ‘no fault’ divorce in England and Wales – it was already available in Scotland – after new legislation came into force last April. But the emotional turmoil that divorce brings is only one source of pain, as the financial cost is also considerable.

What does divorce have to do with the taxman?

Splitting assets between couples who have had their lives intertwined for decades is a complicated business. Add into this the emotion involved in such splits and it becomes very difficult to deal with these issues amicably.

However, when it comes to splitting assets, there may be a tax implication depending on what you do and how you do it. For example, if a couple splits a pension pot – which is taken into account as part of the assets held by one or both spouses depending on their financial position – the way this is done could potentially be a benefit for one or both of you. If the pension itself is likely to breach the £1,073,100 Lifetime Allowance threshold, then splitting this could mean both parties are able to add more to their pension without breaching this limit.

However, pensions are often not split in this way. So, often there is an offset of other assets – one spouse may get the family home, for instance, and the other spouse may keep the pension intact. It all depends on the financial agreements you make in the divorce.

What else should divorcing couples consider?

The pension conundrum is definitely not the only issue for divorcing couples to consider when it comes to their finances. There could be Capital Gains Tax (CGT) charges to think about as assets are split between the two parties.

To be sure there is no CGT to pay on the transfer of assets between you, it would be best to transfer assets before you formally separate – as long as you lived together at some point within the current tax year, which runs from April 6 to April 5 the following year, you shouldn’t have a CGT liability on giving assets to the other spouse.

If you split assets after you have been separated and the divorce has been finalised, then there could be a CGT liability. You can find out more on Gov.uk and by speaking to your accountant.

There are other areas to consider too. For example, if you pay spousal maintenance after your divorce, you may be able to claim tax relief on this. Also, if you had a High-Income Child Benefit Charge while you were with your spouse, you may now be able to claim full Child Benefit. Again, more information is available or you can speak to your accountant.

Contact us

If you are separating from your spouse or civil partner, then please get in touch with us and we can help you make the right financial decisions to keep your costs to a minimum.

Landlords, what should you be doing now?

Changes to the Capital Gains Tax (CGT) allowances announced in the Autumn Statement mean that from next April, the current £12,300 allowance will fall to £6,000 and then to £3,000 in 2024. This is a major concern for landlords with rental property, as this will make a significant dent in the gains they can make on property before they pay tax.

It could mean that any landlord currently holding a considerable gain on a property may want to think about whether now is a good time for them to sell, especially as property values are expected to stagnate or fall, in the coming months.

Private residence relief

However, there are some ways you can reduce your CGT bill. If you have lived in the property at any point, you can get some relief from CGT under the ‘private residence relief’ rules. You can get relief for the number of years you have lived in the property, plus nine months at the end of the ownership whether you lived in the property then or not.

The example on the Gov.uk website highlights a property with a gain of £120,000 when you sell, which you have owned for 15 years. But for 7.5 years you lived in the whole property, and then rented out your property for the remaining 7.5 years. The Private Residence Relief applies for the 7.5 years you lived there plus the last nine months you owned the property.

This means you get a total of 8.25 years of Private Residence Relief, which amounts to 55% of the time you have owned it. So, you will not pay tax on 55% of the £120,000 gain, but you will on the remaining 45% – which means you will pay CGT on £54,000.

The reduction in CGT allowances could prompt landlords to sell

The more than halving of the CGT allowance from April next year means some landlords may attempt to sell some of their properties before the CGT allowance reduces. It will not be the right decision for everyone, but if a landlord is already considering this, now might be a good time to press the button.

Zaid Patel, director of London-based estate and lettings agents, Highcastle Estates: “With the CGT tax allowance to be halved to £6,000 from April 2023, we may see an increase in landlords selling up and second homeowners listing their properties with the hope of completing before April. Landlords, who own property as part of a limited company, will be further penalised as they’ll pay more tax on dividends.

“This, coupled with the rise in corporation tax, will likely lead to more landlords trying to sell their properties. However, with the rising cost of living, first-time buyers will continue to find it challenging to save for a house, which may mean demand will stifle.

“I expect house prices to drop slightly until late 2024, when there will be a rush of buyers hoping to complete before the stamp duty cuts end. It means estate agents will struggle over the next two years and cutting the dividend tax relief while increasing corporation tax could mean estate agents may start selling their businesses or winding up during this recession.”

Landlords have been hit hard

Landlords have been hit hard by various changes to what they can claim and the way in which they are taxed in recent years, especially if they do not hold the properties within a limited company. For example, if someone is getting rental income of £15,000 a year but having to pay mortgage interest amounting to, say, £8,000 a year, then previously they would be able to offset the entire interest against their rental income before tax. This would mean paying tax on just £7,000 of income.

Now, unless they own their properties within a limited company, they are not able to offset the mortgage interest against their income before tax. So, they would pay tax on the full £15,000 of income. If they were 40% taxpayers and all their allowances had already been used, this would give a tax bill of £6,000 when they are also paying £8,000 in mortgage interest. This would leave just £1,000 for the landlord. Paying 40% on the same basis on the £7,000 of income after accounting for the mortgage interest would give a bill of £2,800 – leaving £4,200 for the landlord.

This is one reason that the number of buy-to-let properties being held within a limited company has reached a record level of 300,000 according to estate agent Hamptons.

We can help you

If you have concerns about your buy-to-let property or you want to find out if you would be better off using a limited company structure, then contact us and we will work with you to help you make any necessary changes.

End of bulk appeals for tax fines in May

If you are unlucky enough to be fined for a late filing, then the way in which any appeal can be made changed as of May 7.

Prior to this, HMRC had temporarily reintroduced the ability to bulk appeal late filing penalties for income tax in 2020 and 2021. But from now onwards, all such appeals need to be made individually.

To be fair, if you keep in close contact with your accountant and give sufficient time for all of the paperwork to be done, then you should not be in a position where you are facing a late filing penalty. But if you have either filed paperwork late yourself or had a late filing penalty for some other reason, then each appeal now must be made individually.

Your responsibilities

Even though you use an accountant to deal with your tax liabilities, you are still ultimately legally responsible for the correct and timely filing of your returns. There are several different penalties that could apply too.

Types of penalties

For example, there is an ‘inaccuracy penalty’ which can be applied across specific taxes, including income tax, PAYE, capital gains tax, inheritance tax and corporation tax. This penalty could be anything from 0% to 30% of the extra tax due if the error occurred due to a ‘lack of reasonable care’.

If the error is considered deliberate, this rises to between 20% and 70% of the extra tax due, and if it is both deliberate and concealed, it could rise to between 30% and 100% of the extra tax due.

You could also face a penalty for a failure to notify HMRC of a change in your liability to tax. This could be, for example, if your company makes a profit and becomes liable to corporation tax. Or it could be because your business has reached the turnover for the VAT threshold (£85,000) and you have not registered for VAT.

Other penalties could include ‘Offshore penalties’ and ‘VAT and Excise wrongdoing penalties’ – so it is important if any of these could potentially apply to you, that you speak to your accountant immediately. You can find more information on the types of penalties that could apply on the GOV.UK website.

We can help you meet your obligations

If you think there is a chance that you could fall foul of any of these rules and face a penalty, or that there is any other issue you need advice on to make sure you comply with all your HMRC requirements, please contact us as soon as possible. We will help you navigate any problems that arise.

Claim relief for shares of negligible value

If you have some shares that have become worthless, you can make a negligible value claim. This will allow you to set the associated loss against any chargeable gains that you make in the same, or a later, tax year, potentially reducing the amount of capital gains tax that you pay.

Making a claim

A claim can be made either in your self-assessment tax return or by writing to HMRC.

If you are making a claim in respect of unquoted shares, you will need to provide the following information in support of your claim:

• a statement of affairs for the company and any subsidiaries;
• a letter from the liquidator or receiver showing whether any return will be made to the shareholders;
• details of how this decision was reached (for example, a balance sheet where liabilities are significantly greater than assets); and
• evidence that no recovery or rescue is likely (for example, a statement that the company has ceased trading).

If your claim is in respect of shares in a company that is not in liquidation or receivership, comprehensive evidence to support the claim that the shares are of negligible value should be provided.

For quoted shares, HMRC produce a list of shares that they accept being of negligible value.

Talk to us

Talk to us to find out how you can benefit from making a negligible value claim for shares that have become worthless.

Budget 2021 – Capital Taxes

Capital gains tax (CGT) rates

No changes to the current rates of CGT have been announced at Budget 2021. This means that the rate remains at 10%, to the extent that any income tax basic rate band is available, and 20% thereafter. Higher rates of 18% and 28% apply for certain gains; mainly chargeable gains on residential properties with the exception of any element that qualifies for Private Residence Relief.

There are two specific types of disposal which potentially qualify for a 10% rate up to a lifetime limit for each individual:

• Business Asset Disposal Relief (BADR) (formerly known as Entrepreneurs’ Relief). This is targeted at directors and employees of companies who own at least 5% of the ordinary share capital in the company, provided other minimum criteria are also met, and the owners of unincorporated businesses.
• Investors’ Relief. The main beneficiaries of this relief are external investors in unquoted trading companies who have newly-subscribed shares.

The lifetime limit for BADR was reduced from £10 million to £1 million for BADR qualifying disposals made on or after 11 March 2020. Investors’ Relief continues to have a lifetime limit of £10 million.

CGT annual exemption

The CGT annual exemption will be maintained at the current 2020/21 level of £12,300 for 2021/22 and up to and including 2025/26.

Inheritance tax (IHT) nil rate bands

The nil rate band has been frozen at £325,000 since 2009 and this will now continue up to 5 April 2026. An additional nil rate band, called the ‘residence nil rate band’ (RNRB) which has been increased in stages and is now £175,000 for deaths in 2020/21 will also be frozen at the current level until 5 April 2026. A taper reduces the amount of the RNRB by £1 for every £2 that the ‘net’ value of the death estate is more than £2 million. Net value is after deducting permitted liabilities but before exemptions and reliefs. This taper will also be maintained at the current level.

Business assets and Gift Hold-Over Relief

Gift Hold-Over Relief operates by deferring the chargeable gain on the disposal when a person gives away business assets. The gain then comes into charge when the recipient disposes of the gifted asset. The recipient is treated as though they acquired the asset for the same cost as the person who gave them the asset.

A change to the relief ensures that Gift Hold-Over Relief is not available where a non-UK resident person disposes of an asset to a foreign-controlled company, controlled either by themselves or another non-UK resident with whom they are connected. This measure will affect disposals made on or after 6 April 2021.

Budget 2021 links:

• Business
• Capital taxes
• Employment
• Personal tax
• Other matters