‘Remarkable tax loophole’…or effective planning in international divorce?
International Tax » July 15, 2019
Tax and divorce are interrelated terms in the UK and couples often go to courts for mitigating tax issues after divorce. Sofia Thomas, an independent tax expert in the UK, says that solicitors are not acting effectively to settle tax disputes between the divorcing couples although they spend millions of pounds on it. She thinks that concern for tax liability can bring the parties together for an amicable and effective settlement of disputes regarding tax liabilities. On the 4th June 2019, Sofia’s article titled as ‘Remarkable tax loophole’ … or effective planning in international divorce was published on the Bloomsbury Professional.
In the article, Sofia refers the facts of a case where both the spouses are the nationals of a mainland Continental European country and not domiciled in the UK. The couple have three young children who live in the UK.
However, the case demonstrates that the non-UK domiciled people get several tax benefits in the UK. As a result, the non-UK domiciled individuals have the option to pay tax on remittance basis which allows them to pay tax on non-UK sourced income only when it is remitted or brought into the UK.
In the present case, the husband and wife sought tax advice and agreed that the husband’s payments from his capital would be paid to the offshore account of his wife so that she could remit them onshore without incurring a tax liability. As this was presented to the Judge, he considered it as a tax loophole but admitted that if both parties agree, it is legitimate.
Sofia opines, this seems to be a win for the couple, but it could be more complex for the wife to implement what they agreed. Under the wide definition of a taxable remittance, money or property remitted to the UK and received or used by or for the benefit of a relevant person, is taxable.
However, relevant person includes the individual, the individual’s spouse or civil partner and child or grandchild. Therefore, before the final decree, the wife is a relevant person and the paid amount to her by the husband is taxable. This tax expert suggests that the most effective means for the wife could be to receive the funds into a foreign bank account on condition that she would not remit the funds into the UK until after the decree is absolute.
But another issue arises here about the children who are also relevant persons. They remain relevant persons even after the decree absolute and any funds spent on them even by the mother who is no more relevant now, will be taxable remittance. So, it would be beneficial for the wife not to undertake any funds to earmark directly for the benefit of relevant minor children. In fact, this is a complicated issue which could bind the husband to bear tax liabilities or to go through unforeseen penalties.