Tax and divorce in the UK
Untangling tax liability in a complex system.
International couples are now more frequently seeking arbitration from UK courts in divorce cases. But the courts often need experts to make sense of the UK’s complex tax legislation and decipher the net value of assets to be divided between the parties. Determining the tax liabilities that arise on the transfer of assets between a couple can itself be an area of dispute in a contested divorce.
Seeing through the complications
Key issues requiring consideration, in addition to the location of assets, include the parties’ residence and domicile status for tax purposes, as well as the manner in which different jurisdictions recognise (or fail to recognise) the concept of nominee or trust ownership. Transparency hasn’t always been the order of the day, with beneficial ownership often hidden behind nominee structures. Some countries fail to look through legal ownership to the underlying economic ownership, which can lead to cross-border tax anomalies.
Taking the example of a couple resident in the UK, with one of the parties being domiciled abroad, the most tax-efficient way in which non-UK situated assets can be transferred from the non-UK domiciled spouse may involve use of the UK’s currently beneficial legislation for non-domiciliaries. However, new statutory provisions from 6 April 2017 may shift the landscape in such cases.
No ‘one size fits all’
In contrast to France, where marital property law is prescriptive, the UK does not have any specific legislation setting out how assets should be divided on divorce. The transfer of a French-located property between a UK-resident separated couple constitutes a disposal for UK capital gains tax purposes but is not treated as a disposal in France – another example of a mismatch between jurisdictions which, on this occasion, involves different timings for the disposal under French and UK tax rules.
In other cases, the different tax treatment of investment products between jurisdictions can also have a negative impact. For example, an Assurance Vie life insurance product may be tax-efficient in France and other parts of Europe, but the UK perspective is somewhat different, potentially bringing the UK’s punitive regime for ‘personal portfolio bonds’ into the equation.
Finally, as with all cross-border activity, the relevant provisions of any applicable double taxation agreement (DTA) between the UK and the overseas jurisdiction need to be considered. This isn’t always plain sailing, as some countries can be reluctant to apply the terms of the DTA, particularly if the agreement is historic and not in line with current OECD thinking.
For more information, contact:
Jason Lane or Tim Gillett
Saffery Champness, UK
T: +44 (0)20 7841 4000