Divorce and Taxes – What to look out for
As Albert Einstein said: “The hardest thing in the world to understand is the income tax”. In Divorce cases the main concern is the treatment of tax issues and potential future tax liabilities. In G v G (Financial Provision: Equal Division) [2002] 2 FLR 1143, High Court Judge Coleridge expressed the view that if business assets are transferred between spouses under a Court order (by consent or contested) the recipient gives no consideration as such, since no one has a “right” to financial remedies. Since this decision HMRC ceased to tax transfers and modified their position (but see also the decision in Hill v Haines [2007] EWCA Civ 1284). But what are the implications for divorce and taxes?
Pandemic
Is tax still the hardest thing to understand after the Covid pandemic and its pressure on the economy? The Chancellor has delivered his last budget through which he aims to set the course of the UK’s recovery from the COVID-19 pandemic. The Government has renewed, for what it hopes to be the last time, the various support packages offered to the economy in response to the pandemic and the Chancellor has set out his intention to fund that support through freezing various tax allowances, imposing tax rises in real terms, and increasing the rate of corporation tax to 25% from 1 April 2023. In the interim, the Chancellor hopes to fuel an investment boom by business with the introduction of a 130% “super-deduction” for capital investment, and a resurgence in the hospitality sector with reduced rates of VAT applying until 31 March 2022.
Property Developers
In particular in property developer divorce cases, in which it is difficult to establish the correct starting point for matrimonial resources and the right approach towards luxury property development application (see latest Court of Appeal decision in Ratcliffe v Ratcliffe [2021] EWCA Civ 247 (01 March 2021), future tax implications can have a substantial impact on liquidity issues or risk treatment of assets.
According to the FT, landlords holding properties via company structures are unlikely to change their ownership arrangements despite the chancellor’s move to raise corporation tax. The tax change from 19% to 25 %, announced in the Budget and due to take effect in 2023, will hit rental profits made by limited company landlords with larger portfolios of properties or those generating particularly big profits. Businesses with annual profits of less than £50000 will see the tax rate held at 19% , with the rate rising until it reaches 25% for those with profits of more than £250000 .
5 Point Summary
Here is a brief summary (from a family law perspective) of a number of changes to Corporation Tax / Small profits rate and taper relief / enhanced reliefs for capital investments etc. which might impact current or future financial remedy cases or private FDRs and Arbitration matters in 2021:
- Corporation tax increase: the corporation tax rate will increase to 25% from 1 April 2023; the rate of DPT will be increased to 31% in unison.
- Small profits rate and taper relief: a small profits rate will be re-introduced alongside taper relief. Companies with profits of less than £50000 will continue to be subject to corporation tax at a rate of 19% from 1 April 2023. Companies with profits between £50000 and £250000 will be subject to a rate between 19% and 25% under the similarly reintroduced taper relief mechanism.
- Potential £4m three-year loss carry back: losses of up to £4m incurred during the pandemic will be available for carry back for a three-year period, providing immediate relief to businesses profitable in the years prior to the pandemic. The relief will be available to individuals, partnerships, and companies, applying a £2m. cap for each of 2020 to 2021 and 2021 to 2022 tax years.
- Enhanced reliefs for capital investment: a temporary “super deduction” regime will be available for expenditure qualifying for capital allowances incurred from 1 April 2021 to 31 March 2023. Expenditure qualifying for allowances at the main rate of 18% will be eligible for a deduction of 130%, effectively providing a subsidy of 5.7% that equalises relief now versus relief under the 25% rate of corporation tax in 2023. Assets qualifying for relief at the special rate of 6% will be eligible for a 50% first-year write-down. The Annual Investment Allowance will continue to be £1m until 31 December 2021.
- SDLT cut to be extended: the increase in the Stamp Duty Land Tax nil rate band threshold to £500000 has been extended for a further three months until 30 June. To ease the transition back to normal rates of SDLT, the nil rate band will be lowered to £250000 from 1 July until 30 September, before returning to £125000 from 1 October.
This is blog should not be treated as tax advice and in some complex cases it might be beneficial to instruct a joint tax expert to establish the treatment of future tax liabilities (see BG v BA (Deceased) [2015] EWHC 3947 (Fam) or Cooper-Hohn v Hohn [2014] EWHC 4122 (Fam)).
Please also see our Blog on CGT and the timing of any property or other transfers within the tax year of separation for further information on the tax implications of divorce.
Contact
Paradigm Family Law have a team of experienced and highly recommended divorce lawyers to help guide you through the process of divorce, just waiting to hear from you.
If you would like more details on this or want to discuss your family law matter, please do not hesitate to contact James, Frank, or Evelyn. Paradigm Family Law offers a free initial consultation with a top rated divorce lawyer and our fixed fee solutions cover financial proceedings from start to finish. You can call us on 01904 217225 or email us to [email protected].
