Jeremy: Welcome, Robert. Thank you for joining me today. In my work as a family mediator, I help separating couples navigate the emotional and practical complexities of dividing assets on divorce. The conversation frequently involves tax, which is why having a fast, efficient, and specialist personal tax advisor like you can be really crucial. Can you start by explaining what areas you focus on?
Robert McKee: Thank you, Jeremy, it’s a pleasure to be here. The majority of my experience is specialising in UK and Offshore Tax, with an emphasis on Trusts, High Net Worth Individuals and Personal Tax. I also cover UK company accounting and tax compliance of all forms, as well as providing tax advice as and when required. I like my clients to think of me as a fast, efficient personal tax adviser able to get all their filings done in good time and with least pain. For individuals, particularly those with diverse income sources, rental property, or investment gains, I provide:
- Quick Turnaround: Filing Self Assessment returns with a minimal amount of hassle and a rapid process, ensuring all HMRC deadlines are met well in advance.
- Tax Optimisation: Expert review to ensure every relevant allowance, relief, and expense is claimed to minimise the client’s tax liability.
- Specialist Knowledge: My focus means I keep up-to-date with all the nuances of personal tax legislation, including the complex areas that often impact separating couples, such as Capital Gains Tax (CGT), Inheritance Tax (IHT), and Stamp Duty Land Tax (SDLT).
- Peace of Mind: Clients get the reassurance that their tax affairs are compliant and optimised.
Jeremy: That efficiency sounds incredibly valuable, especially in the work I am involved in when a relationship breakdown is already consuming so much time and emotional energy. Before we dive into the tax specifics, let me take a moment to explain where family mediation fits in.
Family mediation is a voluntary and confidential process where I, as a neutral third party, help separating couples communicate and negotiate agreements about their children, property, and finances.
The benefits of mediation are as follows.
- Empowerment and Control: Unlike court, which hands decision-making power to a judge, mediation keeps the control in the hands of the couple. They make the decisions that work best for their unique family situation.
- Cost and Time Efficiency: It is significantly quicker and cheaper than going through the court system, helping families move forward with their lives sooner.
- Better Communication: It provides a safe, structured environment to help parents and partners communicate more effectively, which is vital for long-term co-parenting relationships.
- Child-Focused: Mediation naturally prioritises the best interests of the children, helping parents create workable arrangements that can be easily reviewed as the children grow.
I often advise clients to seek specialist tax advice early in the process, as it directly impacts the overall value of their assets. Robert, let’s explore those key tax areas now.
Capital Gains Tax (CGT) on the Family Home and Other Assets
Jeremy: One of the biggest assets we discuss in mediation is the family home, or perhaps a second property. If assets are transferred between separating partners, or sold to a third party, when does CGT become a concern. What are the critical CGT implications couples need to be aware of during and after separation?
Robert McKee: CGT can be a complex issue to deal with.
- ‘No Gain, No Loss’ Window: When you are married or in a civil partnership and living together, transfers of assets between you are exempt from CGT under the ‘no gain, no loss’ rule. Crucially, following separation, this rule is extended (by new rules introduced 6th April 2023). The separating couple has:
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- Up to three years from the end of the tax year in which they separated to transfer assets between them on a ‘no gain, no loss’ basis – this is if the transfer is not part of a formal agreement.
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- Or, when part of a formal divorce or dissolution agreement (e.g., a Consent Order) the transfer of assets can be made at ‘no gain, no loss without any time limit.
- Principal Private Residence (PPR) Relief: The main home is usually exempt from CGT. For a departing spouse who moves out, special rules now allow them to:
- Retain PPR relief when the family home is eventually sold to a third party – as long as you haven’t claimed PPR on another property. So they have the choice, if it’s beneficial in their circumstances
- Claim PPR relief on the eventual sale proceeds if they transferred their share – to their ex-spouse as part of a formal divorce or dissolution agreement – but retained a right to a percentage of those proceeds (again, as long as they haven’t claimed PPR on another property.
Jeremy: That highlights a key point: without prompt, clear tax advice, a couple proceeding without a formal divorce could easily miss the CGT-free transfer window or get the PPR rules wrong, adding significant cost and complexity to things.
Inheritance Tax (IHT) and Post-Divorce Gifting
Jeremy: IHT is often overlooked during separation, but it’s vital for estate planning, particularly for cohabiting couples who don’t have the same protections as married couples. What are the main IHT points concerning couples and cohabitants?
Robert McKee: The IHT difference between married/civil partners and cohabitants is stark:
- Married/Civil Partners: Transfers of assets between partners, both during life and on death, are generally exempt from IHT. This exemption continues even during separation until the final divorce order.
- After Divorce: Once divorced, gifts to an ex-spouse are no longer automatically exempt and are treated like any gift to a third party. They become Potentially Exempt Transfers (PETs). If the donor dies within seven years, the gift may become liable for IHT (with taper applied if donor dies after three years and before seven years).
- Cohabitants: Transfers between unmarried cohabiting partners are never exempt and can trigger immediate IHT consequences if the value of the gift exceeds the Nil-Rate Band (£325,000). On death, there is no spouse exemption or transferable Nil-Rate Band, often leading to a much larger IHT liability on the first death.
Jeremy: The difference for cohabitants is a crucial point for us to flag in mediation.
Stamp Duty Land Tax (SDLT)
Jeremy: Finally, let’s touch on SDLT. When one partner buys out the other’s share of the family home, or buys a new property while still legally owning a share of the old one, SDLT can be triggered, often at the higher rates for additional properties. What’s the tax advice here?
Robert McKee: The SDLT rules around separation can be complex:
- Transfers under a Court Order: Transfers of property between separating partners are generally exempt from SDLT (but see caveats) if they are made under a formal separation agreement, Court Order, or as part of a divorce settlement. This is essential for the common ‘buy-out’ scenario. (The position is much more complicated if there is some consideration or a trust structure involved).
- Buying an Additional Property: A significant trap occurs when a departing spouse buys a new residence before formally transferring their share of the former matrimonial home to their ex-partner. This new property purchase will be subject to the higher rate SDLT charge (currently 3%) for additional dwellings. This additional 3% can be reclaimed if it replaced the former main home and the former main home is sold within 36 months, but clearly there are timing issues that require careful planning.
Jeremy: Timing seems to be everything here, which is why integrated advice from both a family specialist and a tax specialist is essential in those kind of cases. It allows the financial agreement reached in mediation to be structured in the most tax-efficient way possible.
Robert, your insights clearly demonstrate the need for timely, specialist tax advice during a relationship breakdown. It ensures that the emotional relief a mediated agreement provides is not undermined by an unexpected tax bill.
Robert McKee: Absolutely. My goal is to support the efficient outcomes achieved in mediation by providing clarity and compliance on the tax side.
Jeremy: Thank you, Robert. It’s clear that combining the non-adversarial approach of mediation with fast, expert tax advice offers separating families the best chance for a clean and cost-effective start to their new lives.
Robert McKee: Thank you.