Spouses, civil partners, divorce, dissolution and separation
As the new tax year approaches, at Paradigm Family Law we look at the implications it has for couples separating or considering divorce and the importance of timing.
When it comes to Capital Gains Tax (CGT), a couple going through separation will lose the tax exemptions available to married couples. It is therefore important to seek expert advice at the earliest opportunity, especially as the new tax year approaches. HM Revenue & Customs has published a help sheet for Capital Gains Tax questions. It explains how spouses and civil partners are treated for CGT.
In short, married couples or civil partners can pass property and assets between each other without any Capital Gains Tax becoming payable on any gain or loss arising. However, this only applies during the tax year of separation. Each individual also has their own personal allowance for CGT exemption and should therefore consider transferring assets during that tax year to maximise the availability of that exemption.
New tax year
The new tax year can not only provide an increase in the amount of tax free allowance available, but by delaying separation until after 5th April a couple can give themselves more time to transfer any assets as between each other, than if they had separated in the previous tax year.
A married couple or civil partners are treated as living together unless:
• they are separated under a court order, or
• they are separated by a formal Deed of Separation executed under seal (in Scotland a deed should be witnessed), or
• they are separated in such circumstances that the separation is likely to be permanent.
In each case the marriage or civil partnership must have broken down. If the marriage or civil partnership has not broken down but the couple does not live in the same house, they may still be still treated as living together for Capital Gains Tax purposes.
Separation, divorce and dissolution
A married couple or civil partners who dissolve their union or simply separate (for HMRC purposes) having transferred assets between them need to carefully consider the tax implications. By transferring those assets before separation couples can save Capital Gains Tax in certain circumstances.
Transfers in the tax year of permanent separation
A married or civil partnership couple living together at some time in a tax year, can transfer assets between each other at any time in that tax year at no gain/no loss. There is no requirement that they should be living together at the time of transfer. HMRC give the following as an example:
Mr Brown transferred an asset to Mrs Brown on 30 June 2013. Mr and Mrs Brown separated on 1 December 2013. Mr Brown transferred another asset to Mrs Brown on 1 March 2014. Both transfers take place for an amount which gives neither a gain nor a loss to Mr Brown. Transfers may take place on this basis up to and including 5 April 2014 even though the couple were not living together after 1 December 2013.
Transfers after the tax year of permanent separation
If a transfer occurs between a married or civil partnership couple after the end of the tax year in which they stop living together, there are rules to decide the date of disposal and the amount of consideration on disposal. These rules depend on the couples’ particular circumstances. The relevant information is:
• the date of any decree absolute or dissolution of the civil partnership
• the date of the court order if the asset was transferred by such an order
• the date of any other contract under which the asset was transferred.
Reliefs are also potentially available such as Private Residence Relief and Hold-over relief. The rules are complicated and it is important that any couple considering separation or dissolution takes specialist tax advice.
Be aware that if you transfer property abroad to your spouse, make sure that you have understood all the tax implications in that jurisdiction or else you run the risk of the local tax authority saying “I’ll be back.”
The top 5 things to consider
In summary, the 5 main points to note when considering Capital Gains Tax are:
At Paradigm Family Law we work closely with tax experts and financial advisers and can assist in getting you the right advice. But you should act soon, with the new tax year approaching don’t delay in taking tax and legal advice. For all enquiries call Paradigm Family Law on 0845 6020422 or email us at [email protected] to arrange a free initial consultation with our specialist family lawyers.