Implications of financial orders — overviewProperty adjustment orders

There are a number of tax consequences arising in connection with property adjustment orders including:

• certain assets may be exempt from CGT, such as the former matrimonial home if it qualifies for the principal private residence relief and depending on the date of transfer and whether the spouse/civil partner who has left has acquired a new property; separate consideration should be given to deferred charges, such as Mesher orders, that are taxed according to their particular circumstances

• where life policies, including endowment policies, are assigned between a couple on divorce, nullity or dissolution of a civil partnership, no chargeable event arises; if a policy is only partly assigned, and the transfer is not ordered by the court, a chargeable event, and therefore a tax liability, may arise.

• there is no stamp duty payable on divorce or dissolution of a civil partnership on the transfer of assets, including the matrimonial home

Periodical payments order

From 6 April 2000 a party paying maintenance is not entitled to tax relief on the payments. The party receiving maintenance is not usually taxable on the sum received. Special rules apply for couples born before 6 April 1935.

Secured periodical payment orders are more complicated and there may be tax issues.

Lump sum orders

The transfer of assets between parties to comply with a lump sum order may attract CGT and careful consideration should be given to the choice of assets to be transferred and the timing of the transfer, which can effect the extent of the liability. In some cases, to avoid a CGT charge arising, transfer should take place before the end of the year of separation.

Separate consideration should be given to the tax treatment of lump sum orders made as a consequence of an application to vary a periodical payments order.

Business assets

There are a variety of different types of business that may be involved in a divorce or dissolution settlement; consequently the tax considerations are complicated. For example, in cases where a couple are jointly involved in a business but cease their business involvement on separation, divorce or dissolution a number of tax issues will arise depending on whether the business is incorporated. Any potential increase in tax liability should be considered in a settlement. Full details should be available for the court. The transfer of business assets should be carefully timed. In relation to a family business, if one party is to retire, the cessation date and use of losses should be carefully considered.

The parties must be made aware of any deferred CGT liability and tax consequences.