Key Tax Changes Affecting Separating Couples
The Autumn Budget 2024, delivered by Chancellor Rachel Reeves, introduces significant shifts in tax policy that could considerably impact separating or divorcing couples. As a family lawyer, it is crucial for us to assess how these changes may influence financial settlements, asset divisions, and related legal strategies. Here’s a breakdown of the key measures and their potential repercussions for those navigating the challenges of separation and divorce.
1. Capital Gains Tax (CGT) Adjustments
A pivotal change in the Autumn Budget is the increase in CGT rates. The basic rate will jump from 10% to 18%, while the higher rate will rise from 20% to 24%. This modification means that couples dividing their assets will face higher taxes when selling certain properties or investments.
For separating couples, particularly those involved in high-value asset divisions, such as shares or investment properties, the cost of liquidating or transferring these assets will rise. In scenarios where one party seeks to retain the family home while compensating the other with liquid assets, the increased CGT may lead to a reassessment of such arrangements. In order to mitigate this tax burden, we must now explore options like staggered asset sales or alternative financial compensations.
2. Property Tax Developments
Although CGT on primary residential properties remains unchanged, stamp duty on additional property purchases will increase from 3% to 5%. This hike affects separating couples looking to purchase new homes, whether for relocation or investment.
For couples transitioning out of joint homeownership, higher stamp duty rates could add significant financial pressure, particularly for individuals looking to buy a new residence post-divorce.
This change could deter some from immediately purchasing new properties and encourage rental solutions, altering standard post-separation housing plans. Additionally, it underscores the importance of timing property transactions strategically to minimize tax exposure.
3. VAT on Private School Fees
It was previously announced in July that private school fees would lose their VAT-exempt status, a change now confirmed. From 1 January 2025, all education and vocational services provided by private schools for a fee will incur VAT at the standard 20% rate. Boarding services will also be subject to this rate.
The new legislation takes effect on 1 January 2025, but any fees invoiced or paid on or after 29 July 2024 for school terms beginning after this date will be VAT-inclusive. As an example, an annual fee of £30,000 will increase to £36,000. If school fees are a part of financial settlements, this additional cost should be considered, particularly with children in early school years.
Parents will need to consider how the increase in fees will be funded and whether those fees are still affordable. If an agreement cannot be reached, parents may need to attend mediation to discuss this.
Ultimately, if matters cannot be agreed, either parent may need to apply to the Family Court for an order to change a child’s schooling. Of course, one parent cannot unilaterally make major decisions about a child’s welfare or education, without the other parent’s consent.
4. Challenges to Financial Settlements
The collective impact of higher taxes could extend beyond asset sales and property purchases to affect broader financial settlement negotiations. For example, increased CGT could reduce the net proceeds from asset liquidations, complicating equitable divisions. This might necessitate recalibrated approaches to lump-sum settlements or spousal maintenance agreements.
Our Recommendations
Early Planning
Parties should be encouraged to seek tax advice early in the divorce process to understand potential liabilities. This proactive step can facilitate informed decision-making, particularly around high-value assets.
Use Financial Experts
Engaging forensic accountants or financial planners can help devise tax-efficient strategies for settlements, potentially involving phased distributions or creative financial arrangements.
Timeline Considerations
The changes to CGT rates will take effect in April 2025. This timeline offers a window for some separating couples to expedite asset transfers or settlements to take advantage of the current lower rates.
For couples whose separations may extend beyond this period, detailed financial forecasting will be essential. Evaluating post-tax asset values and reassessing the viability of asset-based compensations will become more complex as these changes loom.
Conclusion
The 2024 Autumn Budget’s revisions to CGT and stamp duty present a shifting landscape for separating couples, posing new challenges in asset division and financial settlements.
We must adapt to these developments by incorporating strategic tax planning into case management. By addressing these tax implications early, Family Lawyers can better support clients through informed, financially sound separation processes.
Navigating separation is challenging, and the 2024 Autumn Budget brings new tax considerations that can impact your financial settlement.
Get in touch with us today to discuss personalised strategies that can help protect your financial future. Contact Emma Gallant to schedule a consultation and start planning for a secure transition.
