Are divorce lawyers fees tax deductible?

A tax-deductible expense is a deduction that lowers a person’s (or organisation’s) tax liability. This means that the tax you would usually be charged on that service is removed. To qualify, the expense has to be "ordinary, necessary and reasonable". It is commonly asked whether divorce lawyers’ fees are tax-deductible. The simple answer: probably not.

The HMRC now takes a very strict approach to the expenses it regards as tax-deductible, with a tendency to consider any expenses that are not exclusively business related as taxable. As such, the expenses that derive from divorce proceedings, being inherently personal as opposed to corporate, are unlikely to be deemed tax deductible.

This is not, however, to say that divorce lawyer fees are never tax deductible. Indeed, exceptional circumstances where such deductions can be made have been identified, for example, the courts have previously considered these personal legal expenses in connection with the running of a business.

Regular rules for any legal fees

Where a business incurs legal costs or is subject to damages as a result of litigation, a set of strictly observed criteria must be fulfilled for these costs to be considered tax deductible. These normally require the following to apply:

• The costs must be capital as opposed to revenue in nature
• The loss is connected to, or arises from, a taxpayer’s trade
• The ‘wholly and exclusively’ test is satisfied. This test asks whether the legal costs were incurred wholly and exclusively for the purposes of the taxpayer’s trade

HMRC apply a very strict regime, and it is this final prong which highlights that if the cost produces any kind of benefit back to an individual in question, it will be taxable.

Because of this, it would be extremely rare for HMRC to consider a divorce as completely unrelated to the benefit of the individual in question. So even if you decide to pay for your lawyers’ fees through your business, it is still highly likely that you will be able to deduct it from your corporate tax.

Exceptional circumstances

It is possible, however, for an individuals’ trade and personal legal affairs to be completely intertwined. An example would be an individual whose enterprise projects certain family views, or focuses heavily on a well-maintained public image. In cases such as these where the divorce proceedings have the capacity to detrimentally impact both a personal and business reputation, it is imperative for the courts to carefully consider whether the divorce-related expenses are actually wholly and exclusively part of the individual’s trade. Even in circumstances such as these, the court’s interpretation of this final prong will be a narrow one, thereby rendering it truly exceptional for these costs to be deemed tax-deductible. To this extent, we are yet to see a court decision confirm that divorce proceedings are a tax-deductible expense.

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