The tax implications of a marriage breaking down may not be the first thought of many couples but it is an important financial consequence of deciding to separate and divorce. Capital Gains Tax (CGT) is probably the most significant tax to consider when negotiating and agreeing a financial settlement. However, CGT has been subject to a number of changes over recent years – and could be subject to more – so it is always worth speaking to a specialist early on to make sure you are getting up to date advice.
What is CGT? It is a tax that is potentially payable whenever there is a disposal of an asset which has gained in value since it was acquired. It is payable by the person who is disposing of the asset. CGT applies to most assets that could be transferred between you and your ex in your financial settlement and includes stocks, shares, property, holiday homes and commercial units.
Timing is key. Married couples enjoy certain tax advantages, one of which is that they can gift or transfer assets between themselves without being charged CGT. Assets of all types that are transferred between spouses during the tax year in which they separate also pass on what is called a “no gain, no loss” basis which means that no CGT is payable. However, if assets are transferred between spouses in a tax year after the couple have separated, then CGT will apply and the liability will need to calculated and taken into account when negotiating the overall financial settlement.
So a couple who separate on 7 April 2021 have until 5 April 2022 to sort out and transfer their assets without being charged CGT. However, the closer that couple are to the end of a tax year when they separate, the less time they have to sort out their finances and avoid CGT.
The Office for Tax Simplification (OTS) has recently been looking at whether this rule should be reformed. It is widely acknowledged that the length of “CGT-free” time is simply inadequate for many divorcing couples, especially when you consider the average time to secure a divorce in 2020 was 53 weeks and can in many circumstances be much longer. The OTS has recommended that the “no gain, no loss” window should be extended to the later of:
If adopted, this reform would end what is often seen as an unrealistic (and some might argue unnecessary) deadline to expect separating couples to have resolved their financial arrangements by. For now, it is a case of watch this space and continue to ensure that you take specialist tax advice early on so that you understand the implications for your own situation. The family lawyers at Mills & Reeve are supported by colleagues who specialise in private tax and have a huge amount of experience in dealing with the tax consequences of separation and divorce.