BLM partner Grainne Fahy recommends separating couples seek specialist tax advice now with new CGT changes on the horizon
Consideration of tax on or before separation is something that separating couples might not necessarily think of, however, tax advice from a specialist at an early stage is often needed and can be exceptionally valuable and could in many ways make separating less taxing.
Timing is everything. Can it ever be a good time to separate? Whilst it is often very hard and tax is probably the very last thing on your mind, for those in the know, separation on or shortly after 6th April gives the most chance of dealing with your affairs in an organised and timely way. With a bit of luck, and if you have had time to plan your separation and consider how the matrimonial assets will be divided, you should be able to deal with any transfers in that tax year, which may assist in avoiding large sums of money being paid unnecessarily to the tax man. The main tax consideration on separation is Capital Gains Tax. In simple terms, this is a tax on profit that you make when you dispose of an asset. In the context of divorce, this usually arises on the disposal of property or shares in a limited company.
If you are married or in a civil partnership, transfers between spouses can take place on a “nil gain, nil loss” basis. Essentially this means that the recipient acquires the asset transferred at the base cost and as there is therefore no gain, there is no CGT. However this exemption ends on the tax year following separation. After that, and before decree absolute, you will be considered to be “connected persons” and the transfer will be deemed to have taken place at market value and CGT will be payable. After decree absolute, former spouses cease to be “connected persons” and transfers done after that will be taxed on the basis of the actual consideration, if any, rather than the market value.
There is a relief available for separating spouses, called Principal Private Residence Relief (PPR). PPR relief is available for any periods of time during which the property was occupied as the main home. Whilst the family home ceases to be the main residence of the spouse who has moved out, at the moment the final 18 months will still qualify as a period of “deemed occupation” for PPR, and so this allows one spouse to dispose of their share in the family home to the other spouse within 18 months of moving out, exempt of CGT. You can only claim PPR relief on one property at a time.
However, from 6th April 2020, the final period exemption is being reduced from 18 months to 9 months and the tax will be payable within 30 days of the sale or transfer. This could have significant implications in terms of the division of assets on divorce.
It is accepted that negotiations relating to finances on divorce can take time and so the transfer of the family home can fall out of this period. PPR relief is extended up until the transfer, where one party disposes of their share under a court order or other agreement made in contemplation of a permanent separation. However, it is important to note that this additional relief does not apply if the property is being sold to a third party.
Specialist advice at the earliest opportunity is strongly advised, particularly if there are substantial assets. Tax implications ought to be considered carefully when negotiating the financial aspect of your divorce as the CGT consequences of a proposed settlement might well be considerable.
I’m a firm believer that the protection of wealth on divorce should be given the same attention as wealth protection before and during the marriage.
So, if you have come to the sad conclusion that 2020 is the year in which you have decided to separate then it’s never too soon to get advice on what this means for you and your family.
Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to customers of BLM. Specialist legal advice should always be sought in any particular case.