Labour’s long-awaited Autumn Budget was announced last week introducing several changes to tax policy which could have a significant impact on how a couple divides their assets on divorce, and their overall settlement.
This article considers the key measures introduced by the Budget and their potential influence on a couple’s financial settlement and post-separation financial planning.
Capital Gains Tax
The main rates for capital gains tax (‘CGT’) that apply to assets other than residential property and carried interest have been increased. For disposals made on or after 30 October 2024, the CGT rate has increased from 10% to 18% for basic rate taxpayers and 20% to 24% for additional rate taxpayers. This change brings the rates in line with the rates for disposals of residential properties which are not your main home. The CGT rise impacts couples who have invested in second properties, stocks and shares (outside of ISAs) and other valuable assets which need to be sold on divorce.
The Spring Finance Bill 2023 brought in new CGT rules which enables divorcing couples to transfer assets to one another without triggering CGT. The increase to CGT therefore impacts those assets which need to be sold to facilitate a settlement. Any additional tax paid on the disposal of assets will reduce the couple’s net proceeds of sale and could therefore influence how a couple chooses to divide their property and investments on divorce.
Further assessment regarding the tax position will be necessary so as to avoid one party being disproportionately burdened with high tax liabilities.
Further, if one party is set to receive an asset on divorce tax free, careful consideration must be given as to whether they will need to, or want to, sell it in the future as they will be solely responsible for the future CGT on the disposal of the asset once the divorce is finalised.
For business owners, the Business Asset Disposal Relief from CGT is increasing from 10% to 14% from April 2025 and to 18% from April 2026, which will affect the net value of a business, and will therefore alter the way negotiations are handled in relation to business assets on divorce.
Non-Dom Status
The “non-dom” tax regime will be abolished from April 2025. Under the current regime, UK tax residents whose elected domicile is outside the UK can benefit from a more favourable tax treatment. A non-dom only pays tax to the UK government on the money they earn in the UK but they do not have to pay UK tax on income made anywhere else in the world, unless it is paid into a UK bank account.
With the abolition of this tax regime, individuals will now face a higher tax liability on their foreign income. For divorcing couples with overseas assets, their net asset position may be reduced having an impact on their overall financial settlement.
Family Businesses
The Budget introduced several measures which will have a negative effect on business owners. The first being the increase to employers’ National Insurance contributions. The rate will rise from 13.8% to 15% as of April 2025 and the employee earnings threshold at which an employer pays national insurance will be reduced from £9,100 to £5,000 per year. Secondly, the National Living Wage is rising from £11.44 an hour to £12.21 an hour. The higher national insurance and national living wage could substantially affect the profitability of some businesses. Business owners may be taking home less profit which could alter the way spousal maintenance is agreed during negotiations.
If a business’ profits are reduced, then the overall value of the business could also decrease. When negotiating a settlement, the valuation of a business is always a vital part of the process, and therefore any reduced profits may well modify how the assets are divided and what the end settlement looks like.
VAT on school fees
The introduction of VAT to school fees was a well-established part of the Labour manifesto. As of 1 January 2025 all private schools fees will be subject to VAT at the standard rate of 20%. The payment of school fees could therefore form an important part of negotiations if the couple’s financial resources are already strained, and particularly if the children are younger.
Stamp Duty Land Tax
The higher rate for the purchase of additional properties will increase from 3% to 5%, effective from 31 October 2024. Additionally, the threshold for the 0% SDLT band on residential property will reduce from £250,000 to £125,000. Given this change, it may be more difficult to meet a couple’s housing needs post-separation whilst divorce negotiations are ongoing if one spouse wishes to buy a property but retain their interest in the family home until a settlement is reached.
Should you wish to discuss any aspect of the budget and its impact on your family, please contact our specialist Family Law & Divorce Team and we would be delighted to assist. Or contact Hazel McNaught hazel.mcnaught@daviesandpartners.com or Olivia Emmett
olivia.emmett@daviesandpartners.com
