Helen Davies, Associate analyses the recent proposed changes to Capital Gains Tax (CGT) on divorce outlined in the Autumn Budget.
Divorce is undoubtedly one of the most difficult life events someone can face, and whilst any future tax liability is unlikely to be the first thought upon separation, it does need to be considered in any divorce settlement. Many couples will not be aware that the timing of their separation and/or the transfer of assets could potentially lead to unexpected tax consequences with capital gains tax (CGT) being generally the most important.
Capital Gains Tax or CGT is a tax on the profit made when you sell or otherwise dispose of an asset where the value has increased.
Currently, married couples and civil partners can transfer assets freely from one another without incurring CGT and this is known as the “spouse exemption”.
The issue with the current tax rules for separating couples, however, is that the spouse exemption can only be used up to the end of the tax year of separation and not from the point that the divorce is granted. Therefore, under the current rules, a couple who separated in late March for instance, would only have a matter of days until the end of the tax year in early April to implement any transfers to avoid a potentially large CGT bill.
The proposed changes
Last year the Office of Tax Simplification (OTS) argued that it was “unrealistic to expect separating couples to have resolved their affairs by the end of the tax year of their separation”.
As a result, earlier this year, HMRC published draft legislation due to come into effect from next April which would change the rules on the transfer of assets between spouses and civil partners who are in the process of separating.
The proposed changes would see the introduction of more favourable tax rules and hopefully give separating couples some breathing space to negotiate and implement a fair financial settlement.
The changes appear to have been confirmed within the Autumn statement and will therefore be legislated for in the forthcoming Finance Bill. As such, separating spouses/civil partners will be given:
- Up to 3 years, after the year of their physical separation, to transfer assets
- Unlimited time when the assets are the subject of a formal agreement set out in a Court Order
There will also be an option for a party who vacates the former family home, to allow the other party to continue residing there with the children of the family perhaps, to claim relief on the eventual sale of the property.
Other considerations
Whilst these changes should result in the tax being paid by separating couples being reduced significantly, separating couples will still need to consider any other tax consequences of their proposed financial settlement where other asset disposals are anticipated.
For instance, the amendments would not apply to the sale/transfer of any assets abroad meaning there may be tax payable in the relevant country
CGT cannot be completely ignored domestically either. These changes would make it easier to transfer assets particularly where perhaps the separating couple are asset rich and cash poor and would wish to avoid selling assets to meet tax, any settlement would still need to consider that the party retaining an asset will ultimately be responsible for any CGT upon any future sale. Any such CGT will also be calculated using the original acquisition value and not the value upon transfer.
With that in mind, it has also been confirmed within the Autumn statement that there will be a reduction in the CGT Annual Exempt Amount limiting the relief available.
Any dividends and/or bonuses drawn down via a business will likely still trigger tax liabilities and the reductions to the income tax additional rate threshold (ART) and dividend allowance should also be borne in mind.
If you are concerned about reaching a financial settlement and the tax implications, it is best to get early expert advice. Without advice, what may on the face of it be an equal division of the family assets, could leave one party with a hefty tax bill which ultimately skews the net effect of any agreement.
Forward planning to make use of any available tax reliefs to either or both parties can mean the tax liability for a divorcing couple can be significantly reduced. We at DTM regularly work closely with trusted partners or a client’s existing advisors to ensure clients are aware of their options.
If you are thinking of separating or divorcing and wish to talk to a member of our family team, please get in touch with Helen Davies at helen.davies@dtmlegal.com
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