Martin Rimmer and Christine Teo
Spice Taxation
The UK Tax Implications of Separation and Divorce whilst living in Singapore
More often than not, couples dealing with marriage breakdowns have got more on their minds than just their finances, and even less so their tax positions. For those divorcing outside of the UK, probably away from the support of closest family and friends, this is all the more the case, and it is tempting (but sadly wrong) to assume that there are no UK tax consequences of divorce whilst ‘non-resident’ for UK tax purposes. An unexpected tax bill, be it immediate or future, would have a negative financial impact on a divorcing individual and it is important that professional tax advice be sought as early as possible to manage such unpleasant surprises.
The purpose of this short article is to highlight some of the main UK tax issues you need to be aware of. These are:
- Capital Gains Tax Implications on the transfer of assets
- Tax Residence Considerations
- Planning for Relocation to the UK
- Domicile and Inheritance Tax
Capital Gains Tax Implications
The transfer of assets is perhaps the most prevalent course of action taken amongst divorcing couples, and in tow, it is necessary to identify whether UK Capital Gains Tax can still apply on the transfer of those assets. From permanent separation to pronouncement of decree absolute, the CGT implications in relation to transfer of assets at different stages of a divorce can be categorised as follows:
| Transfer of Assets | Capital Gains Tax Implications |
| Whilst living together up to the point of permanent separation | Transfer of assets at any point during the tax year in which a couple permanently separates is on a no gain / no loss basis, as with transfer of assets between spouses. i.e. no charge to Capital Gains Tax. |
| In the UK tax year following permanent separation and prior to decree absolute | During this period, the transfer of assets is deemed to be transacted at market value as the separated couple are still legally ‘connected’ persons. A special rule on capital losses termed as ‘clogged losses’ applies wherein such losses can only be offset against capital gains on assets transferred to the same individual during this period. |
| After decree absolute (finalisation of divorce) | Any assets transferred between former spouses after the divorce has been finalised will be treated as a Capital Gains Tax event based on the actual consideration received, as they are no longer ‘connected’ persons. Consequently, any losses arising from the transaction can be used to offset against current or future years’ capital losses. Gifts without reservations of benefit are ‘potentially exempt transfers’ for Inheritance Tax purposes, which must be survived by 7 years. |
Tax Residence Considerations
Your tax residence status should also be taken into consideration in the event of transfers or disposals of UK assets. Generally, British nationals living and working abroad are non-residents for UK tax purposes to the extent that they fulfil the conditions outlined in the Statutory Residence Test and are not temporary non-residents .
As non-residents, only income generated in the UK is subject to UK Income Tax, such as rental profits from a UK property. However, the transfer of UK land and property assets, as well as certain business assets and holdings in ‘property rich’ companies whilst non-resident is liable to Capital Gains Tax and must be reported, with the relevant tax paid. Happily, the transfer of non-UK assets whilst non-resident does not generally trigger a UK Capital Gains Tax, though this is possible if you are a ‘temporary non-resident’ – see footnote. In any event, I would recommend that you also seek tax advice in the jurisdiction in which the asset is situated as there could be local considerations to bear in mind.
Based on the above, there are tax advantages to making the transfer of assets whilst non-resident for UK tax purposes, albeit care is needed with UK land and property interests, business assets, shares in ‘property rich’ companies and we need to be alert to the temporary non-resident provisions.
In any event, professional advice should be sought and we can calculate tax exposures, confirm exemptions and help to lodge relevant tax disclosures to HM Revenue & Customs.
What If You Want to Return to the UK?
It is possible for divorcing couples to want to return back home to the UK for personal reasons while divorce proceedings are ongoing. By default, an individual will normally be treated as UK tax resident for the tax year in which they return to the UK, unless conditions are met to qualify them for ‘Split Year Treatment’ to extend the non-resident period through part of the tax year in which they are still living abroad.
That said, upon becoming a UK tax resident, the transferor spouse may become liable to Capital Gains Tax in respect of the global assets they transfer to the recipient spouse, depending on the table above.
As we can see, timing is key in determining the tax outcome as a consequence of asset transfers between two individuals who are still legally married or former spouses. It is not unusual, however, for external factors not within their control to upset plans and alter tax consequences. Therefore, it is necessary to take a step further to optimise tax outcomes before a divorcing couple or individual repatriates to the UK. This can be achieved by reviewing their existing worldwide assets (investments, shares, business, etc.) and consider any need to restructure them or if any adjustments to the structures currently in place are needed to ring fence their private wealth against UK taxes.
Domicile Considerations and Inheritance Tax
We have talked about tax residence above and how that is important for Capital Gains Tax (and Income Tax) purposes. However, when we talk about Inheritance Tax a different principle, known as ‘domicile’ determines the extent to which your estate, or transfer of assets from your estate upon divorce, can be caught by UK Inheritance Tax (IHT).
As a broad rule of thumb, the global estate of an individual with a Domicile of Origin (taken from their father assuming their parents were married at their birth) in the UK falls within the scope of IHT even if they are not UK tax resident. For an individual domiciled outside of the UK, only the UK estate is within the scope of IHT, even if they are UK resident for tax purposes.
Up to the period before decree absolute, most transfers between spouses are exempt from Inheritance Tax (IHT) to an unlimited amount. This holds true for transfers between spouses of the same domicile (either UK or non-UK) and from a non-UK domiciled to a UK domiciled spouse. However, where assets pass from a UK domiciled to a non-UK domiciled spouse, such transfers are ‘potentially exempt transfers’ (PETs) which must be survived by 7 years and without reservation of benefit , failing which the value of transfers will be taxable at 40% after prevailing allowances and reliefs. After decree absolute, transfers between former spouses are treated as PETs.
In the context of a divorce, transfers made under a court order are exempt from IHT, provided these transfers do not confer a gratuitous benefit upon the recipient.
If a UK-domiciled divorcing couple or individual does not intend to return to the UK permanently, taking a Domicile of Choice abroad to displace their Domicile of Origin could be advantageous toward IHT planning. Adopting a Domicile of Choice abroad is a comprehensive process. Certain conditions need to be fulfilled and it isn’t simply a question of living outside of the UK for a long time. We can certainly work with you to examine this option for longer term Inheritance Tax planning if you wish.
In Summary
Tax planning and asset structuring play a very important part in wealth and tax protection before, during and after a divorce. However, advice should be taken as soon as you feel vulnerable and no later than around the time of separation.
Trust structures are common vehicles used by couples to protect assets against marriage breakdown and divorce, and which can also help in making longer term financial provision for yourselves as well as your children.
The Tax Team at Spice Taxation stands ready to provide advice, support and guidance while you are going through a difficult time in your life. Please get in touch if you need assistance in any aspect of your UK tax, wealth and succession planning.