Case studies

Tax Planning in Divorce for US persons

The client challenge

Divorce is a very stressful time and unfortunately often added to these stresses are concerns regarding the tax liabilities which need to be considered in respect of a divorce settlement.

The Deloitte approach

The US/UK High Net Worth team has extensive experience of advising on divorce, we would look to understand the wealth profile of the divorcing couple and then provide clear, comprehensive and easily understood practical advice on how to manage the tax issues whilst ensuring an equitable split of assets.

Issues to consider

When considering a divorce settlement, a number of factors need to be considered, and matters are significantly more complicated if one (but not both) parties to the divorce are US citizen/residents.

For both UK and US purposes the primary issue will be whether there will be gain recognition on the transfer of any assets (for UK purposes this can usually be avoided where a transfer happens within the necessary time frame) but in other cases the overall settlement may need to be modified to ensure an optimum split of net assets. It is therefore recommended to engage the US/UK High Net Worth team earlier rather than later and before any settlement becomes ‘fixed’. Additional considerations include;

  • Is there an in-built unrealised capital tax liability on retained assets which should be factored into the divorce settlement? 
  • For individuals who are or were on the remittance basis, will the settlement result in them being deemed to remit income/gains?
  • Will US gift tax be avoided?
  • Is there potential for an exchange rate gain on the transfer of any mortgage liabilities?
  • If gain is going to be recognised on property transferred and will the Section 121 Housing Exclusion, be available?
  • Should alimony/maintenance be structured so it is taxable to recipient and deductible by payor? Might there be a withholding tax obligation and is the amount payable net or gross of this?
  • What is the tax treatment on IRA’s and/or pensions where rights are divided?
  • During and after Divorce what will be the applicable filing status?
  • Which party to the divorce can claim minors as dependents if there is shared custody – can this be included/allocated in the settlement?

The outcome

The US/UK High Net Worth team can help work with clients and/or their solicitors to navigate all of the above complex issues and ensure that any divorce settlement is ‘tax optimised’ such that ‘tax’ need not be an added stress during what is already a very difficult experience.

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