Divorce and tax – the implications for farmers
The tax provisions apply equally to divorcees and the cessation of civil partnerships. Generally, there are three taxes to be considered: Income Tax, Capital Gains and Stamp Duty land Tax.
Firstly, from an income tax point of view, all maintenance payments are tax free in the hands of the recipient and do not qualify for tax relief in the hands of the payer.
Secondly, there are a number of issues to consider when dealing with capital gains tax. One of the most critical issues is the date of transfer of an asset. Where an asset is transferred on a date after the decree absolute, the date of disposal is the date of the court order. Transfers between spouses are exempt from capital gains tax until the end of the tax year in which a couple separate. Once the date of separation has been established and the end of the tax year in which separation has occurred or deemed to have occurred has passed, couples do not have any capital gains tax exemptions for transfers of assets.
If a couple jointly own a number of investment properties and the financial settlement provides for the properties to be divided, a form of roll-over relief may be available.
Where the married couple share interests in a business and the marriage settlement involves a division of the assets e.g. land, machinery, stock, there are a number of capital gains tax reliefs to be considered. If the transfer is not in exchange for money and is made as a result of a court order, hold-over relief may be available, if appropriate. Where actual money is to be paid, Business Assets Disposal Relief may be appropriate.
Where the business is operating as a company, capital may be extracted from a company by way of company purchase of own shares. For this to work, there must be sufficient cash available to be paid over at completion. Where a company purchase of own shares is not possible, then other options to be considered are the formation of a new company or a demerger.
Stamp Duty requires to be considered with each of these options; generally, transactions done in pursuance of a court order in divorce are exempt from Stamp Duty.
Meeting the financial requirements of a divorce can place a financial strain on a business and there are tax consequences to be considered.
Early consultation with the farms accountants in liaison with family solicitor is necessary to ensure the sustainability of the farm business.
For further information, telephone (028) 8224 1515