Events of the last couple of years have put considerable pressure on many relationships, resulting in an increase in separation and divorce amongst married couples. The tax consequences of separation are often overlooked.
Most separations result in a transfer of assets between the married couple. Typically, these assets would be a family home, buy-to-let properties, business assets or investments. For the wealthy, there can be significant exchanges of capital sums which are likely to have increased in value over the course of the marriage.
In most circumstances, there is no capital gains tax liability when assets are transferred between married or civil partnership couples. In effect, there is a no gain, no loss position. This being the case, it seems logical that there is no capital gains tax between divorcing couples if they transfer the assets before the divorce is formalised. Unfortunately, this is a common misconception.
Many couples appreciate that they must pay some capital gains tax on the transfer of assets after the partnership has been legally dissolved. They might not however realise that there could be a capital gains charge on separation before the formal divorce.
Where a couple have lived together at any point in the tax year in which assets have been transferred, the married couple do not have to pay capital gains tax. However, if a couple have separated in the previous tax year, then capital gains tax will be owing on the transfer of assets.
This can have an important tactical, timing impact on separation and divorce agreements and the transfer of assets. It also suggests that separating is best done on the 6th of April (earlier in the tax year), rather than the 31st of March (at the end).
There are potential issues for the main home around gifting or selling and exemptions of principal private residence which need to be assessed individually. A spouse moving out of the family home may lose a portion of their principal private residence relief without realising. In short, there are many considerations which have a bearing on the financial outcome.
A tip to consider when supporting individuals is ‘Can assets be transferred in the tax year of separation or within 9 months of separation?’
At Elsby we review the capital gains implications of any transfers of assets, additionally considering if there are any mitigations for the tax amounts due. This can maximise the pool of funds available to be shared between the parties. By undertaking this, both parties are jointly aware of the tax implications, allowing for communications to be improved when negotiating the financial settlement. After all this, we then support individuals with their reporting requirements to HRMC once assets have been transferred.
Separation is never easy, but steps can be taken to ensure couples don’t make an awful year even worse.