Whatever the reasons for a marital breakdown, tax issues will almost inevitably require consideration. In the last edition of In the Spotlight, I talked about the importance of timing in the case of a divorce where there are no international aspects. Timing in such cases is still significant but the opportunities for management of the tax liabilities which can arise tend to be more limited because we only have the tax year of separation to make 'tax neutral' transfers. After that, transfers between separated spouses are, in most cases, treated as though there has been a sale for market value consideration.
Example: 'non-dom' but UK resident
The issues are more complex for non-UK domiciled individuals, but they also present greater opportunities for tax efficiency. Let us use Claude and Marie-Claire by way of example.
Both are non-UK domiciled but UK resident. As part of a divorce settlement, Claude is required to pay Marie-Claire a lump sum of £1m to fund her UK lifestyle. To facilitate this, Claude intends to realise an overseas investment portfolio, which is standing at a substantial gain overall. If, prior to the divorce, Claude sells the investments and transfers the sale proceeds to Marie-Claire in the UK, any gains on the investments will be charged to UK CGT on Claude. If, however, the sale proceeds are not transferred into the UK until after they are divorced, it is possible that there will be no UK CGT.
In order to obtain this beneficial treatment, Claude would have to make a claim for the 'remittance basis' of taxation to apply for the tax year in which he realises the investments (though not necessarily for the year in which the proceeds are actually brought into the UK) and he would have to pay a levy of between £0 and £50,000 (depending on the length of time that Claude has been UK resident). Provided the circumstances are right, overall this may be an inexpensive way of achieving the original objective.
Such circumstances clearly offer great opportunities to produce a more tax-efficient divorce settlement, which is in the interests of both parties. The law may help determine which assets form part of the settlement, as well as when and how the practical elements are fulfilled.
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