Tax is unlikely to be at the forefront of an individual’s mind when they are going through a separation.

However, a lack of tax planning in these circumstances can result in costly tax bills.

Where possible, it can be beneficial for assets to be transferred between a couple while they are “separated” but prior to divorce. This is because there are special capital gains tax (“CGT”) rules for the first tax year in which a couple are “separated”.

Transfers between certain “connected parties”, e.g. parents and their children, are usually treated as deemed disposals at market value for CGT purposes. This can trigger a CGT liability for the individual transferring the asset. The “connected party” rules do not normally apply to transfers between spouses. Transfers between spouses are instead made at “no gain, no loss” which does not trigger a CGT charge. This “no-gain, no loss” treatment applies in the tax year of separation only. Hence, it can be beneficial for assets to be transferred between a couple in the first tax year of separation in order to prevent upfront CGT charges. Advance planning can be particularly beneficial where, for example, a couple has multiple properties.

After the first tax year of separation the “connected party” rules apply such that transfers of assets can result in a CGT liability for the transferor.

After divorce spouses are no longer “connected” parties for CGT. Capital gains will therefore be calculated with reference to the actual consideration given unless the transaction is not carried out on “arm’s length” terms. It worth noting here that there are specific CGT concessions where the main residence is transferred to one spouse or sold as a result of a divorce settlement.

Other tax considerations

Transfers under a divorce settle settlement should not trigger any immediate income tax or inheritance tax (“IHT”) charges. Of course if an individual receives income generating assets as part of the settlement, they may need to pay tax on those assets going forwards.

Transfers made on divorce under the terms of a court order are also exempt from IHT provided there is no gratuitous benefit conferred as a result of the arrangement. Transfers between individuals after divorce follow normal IHT principles i.e. gifts made in the 7 years prior to an individual’s death can result in IHT charges. This is because gifts made in the 7 years before you die utilise the inheritance tax nil rate band of £325,000 in priority to the assets you own on death.

If you would like any further detail on this topic please contact a member of our tax team!

If you are not within self-assessment and have interest in excess of the savings allowance (£1,000 for basic rate taxpayers; £500 for higher rate taxpayers), HMRC will use information obtained from bank and building societies to restrict 2017/18 tax codes to collect the tax due.

If there is a significant change between to 2016/17 and 2017/18 HMRC should be contacted to be given a more realistic estimate. Income from joint accounts will not be included in HMRC estimates.

If you would like to speak to a member of our Tax Team as to how this may affect you, please go to our Contact Page or email us on [email protected]. 

Simplifying ISAs Inherited on Death

ISAs inherited on death have become more straightforward following changes for deaths after 5 April 2018. These updates allow ISAs to retain their tax-free status from the date of the account holder’s death. This means they can provide significant benefits for surviving spouses or civil partners. This simplification ensures no income tax or capital gains tax liability until specific conditions are met, offering clarity and financial relief during estate administration.

Key Changes to ISA Rules Upon Death

For deaths after 5 April 2018 there is a welcome simplification.  From the date of the account holder’s death they will retain their tax free status.  So there will be no income tax or capital gains tax until the earlier of:

• Three years from the account holder’s death
• The administration of the estate being complete
• Closure of the account

This will also mean that where this is passed to the surviving spouse or civil partner, the additional permitted subscription (additional contribution to an ISA in that tax year)  will be the higher of the value at date of death or value when the account ceases to be a continuing deceased’s account.

This is great news.  Hopefully this might also mean that the holdings can be transferred in specie but we will have to wait and see.  Currently they have to be liquidated.

How We Can Help

At Lewis Brownlee, we specialise in guiding individuals and families through complex financial matters, including managing ISAs inherited on death. Our expert team can help you understand the implications of these changes, ensure you maximise the benefits of tax-free allowances, and navigate the rules around additional permitted subscriptions. Whether you’re administering an estate or need advice on transferring ISA holdings, we’re here to provide tailored support. Contact us today to find out how we can make the process as smooth and stress-free as possible.

If you’d like more information on how we can help you, get in touch by emailing us at [email protected] or call us on 01243 782 423.