With the end of the current tax year fast approaching, family solicitor, Nicola Cancellara, urges separating couples to consider the possible implication of tax on their assets.
For most divorcing couples, tax issues are way down the list of things to be considered. Top of the list are
- What’s going to happen with the house?
- How are assets going to be divided?
- How is care of the children going to be shared?
However, with the end of the current tax year fast approaching, now is the time for vital specialist advice to be taken where the transfer of assets is being considered, as underestimating the implication of tax could lead to everything that has been worked so hard for during the marriage or civil partnership being reduced due to hefty tax bills, including capital gains tax (CGT). The consequential tax implications on settlements should never be underestimated.
Is capital gains tax payable?
Spouses are treated as ‘connected parties’ for the purposes of CGT, which remains the case throughout any period of separation or divorce proceedings until decree absolute is pronounced. The basic rule is that up to and including the tax year of permanent separation, the transfer of assets between spouses, for example shares in the family business, investments or property, results in no immediate CGT liability arising on either party. Transfers are dealt with on a ‘no gain – no loss’ basis.
However, any asset transfers made following the tax year of separation, but before pronouncement of decree absolute are assessed on the transferring spouse. Therefore, wherever possible, a transfer of assets between spouses where a CGT liability may arise should be made before the end of the tax year in which separation takes place. This is always the 6thApril.
Of course, there are circumstances where this is not always possible, for example where one party is not prepared to negotiate and applying for divorce is the only way in which financial issues can be dealt with.
Important timing relating to tax and divorce
Timing is important. Couples who don’t separate until just after the 6th April will have up to 12 months to arrange their tax affairs in the most efficient way. However, for couples who have already separated, the opportunity to the make best use of the “no gain, no loss” rule is fast diminishing.
Former spouses need to be aware that after the decree absolute, they are no longer treated as ‘connected’ and transfers between them are no longer deemed to take place.
CGT will be based on the increase in the value of the asset since it was purchased, although special rules apply to the spouses’ principle private residence.
For further information about divorce and separation, contact our experts now. We will always recommend that you take specialist tax advice.