No fault divorce
The current law
There have long been calls for a reform of divorce legislation, not least from many practitioners who feel the law, as it has stood since 1973, is outdated and enables conflict to escalate between separating parties.
Currently there is one ground for divorce: the irretrievable breakdown of the marriage. This must be supported by one of five ‘facts’:
- the other spouse's adultery,
- the other spouse's unreasonable behaviour,
- two years' separation (with the other spouse's consent),
- five years' separation,
- or desertion.
Where adultery and unreasonable behaviour are concerned, examples of such behaviours must be presented in the Divorce Petition. At this point the temperature can rise and spouses, aggrieved at being blamed for the separation, start to dredge up old resentments.
Starting the divorce process in conflict can be detrimental to the whole process. Many people may not wish to lay the reasons for the marriage breakdown at their spouse's door, nor themselves be blamed for what might be considered a joint responsibility but are forced to by the current legislation.
The new law
The Divorce, Dissolution and Separation Act 2020 received Royal Assent last year and is due to be implemented on 6 April 2022. The Act will reform the divorce process and remove the current concept of fault.
The changes follow the widely reported Supreme Court case of Owens v Owens (2018), in which Mrs Owens was refused a divorce (which her husband had contested) on the grounds that the examples of his unreasonable behaviour she had given in the Petition were insufficient to meet the legal test.
Amongst other things, the new law will:
- replace the five ‘facts’ with a new requirement to provide a statement as evidence that the marriage has broken down irretrievably; and
- remove the possibility of the other spouse contesting the divorce, other than in very limited circumstances.
Some have criticised this change in the law for making divorce too ‘easy’. For many clients, this will be a welcome step to reduce conflict in what is inevitably a challenging and difficult period in their lives.
Tax effects of divorce
The tax consequences of divorce are likely unaffected by this change, but any tax implications must always be considered.
Capital gains tax and income tax
A key date to be aware of for UK tax purposes is the 5 April after the date spouses (or civil partners) separate. The period beginning with the date of separation and ending the following 5 April is known as the "tax year of separation". It is during this quasi-"grace period" that transfers can still be made between spouses on a no gain no loss basis, thereby without triggering any capital gains tax (CGT) charge. CGT would otherwise be payable by the transferor at up to 20% or 28% on any gain – so this is an especially important date for the spouse giving away assets.
Transfers between husbands, wives and/or civil partners after the tax year of separation will likely trigger a UK CGT charge and filing obligations for the spouse transferring assets to their former partner. It is important to remember that the stage of the formal divorce proceedings will dictate when the transfer is deemed to take place, and hence when any CGT will become payable. There are special rules for transfers of the family home, particularly where principal private residence relief (PPR) is available.
There are tax reliefs available for any stamp duty land tax (SDLT) and stamp duty on shares for transfers made as a result of divorce. However, documenting the timing, agreement and purpose of such transfers will be vital to successfully qualify for any reliefs. Unlike CGT, stamp duties are usually payable by the recipient, who must therefore keep these duties in mind.
Inheritance tax in the scope of divorce is somewhat of an oddity. For inheritance tax purposes, transfers between spouses are exempt from inheritance tax (though this exemption is limited when assets are transferred from a UK domiciled spouse to a non-UK domiciled spouse). Whilst divorcing couples, for CGT purposes, are effectively viewed as unconnected persons from the 5 April following their separation, for inheritance tax purposes, they remain connected until the decree absolute or (for civil partners) the final order. Therefore, the exemption is available until then.
Notably, gifts of assets between individuals would not usually trigger an inheritance tax charge unless the donor does not survive at least seven years after making the gift. However, where the spouse exemption does not apply, those seven years become much more important for the recipient.
In keeping with the new conciliatory changes to divorce procedures, the reasons for (legal and tax consequences of) a divorce or dissolution are best considered early – for the benefit of both parties.