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Business Tax  •  capital gains tax (cgt)  •  Personal tax  •  Personal Taxation  •  Tax Planning

How can a date of separation possibly have tax implications?

By Victoria Rampton on 17 July, 2015

The tax implications of separation and divorce is a topic that sadly affects many people and there are some significant rules it is useful to be aware of, regardless of how strong your current relationship is with your spouse or civil partner.

Firstly, they say there is never a good time to separate, which is true from the perspective of the emotional and physical strain. But financially it’s a different story, because the time of year when a separation becomes permanent can have big tax implications as our blog will explain.

The capital gains tax rules governing the transfer of assets between married couples

For the duration of a marriage or civil partnership, assets can be transferred between a married couple/ civil partners without a gain or loss. This means that no capital gains tax is payable on a transfer of assets whilst a couple are together and during the tax year of separation; the assets are simply taken over at the same base cost.

Once a couple permanently separate (note that this does not mean divorce) then in the tax year following the separation, their assets cease to be transferable between them on this basis.

 

Capital gains tax rules applying to couples who separate and divorce:

  • Transfers in the tax year of separation are made at no gain/no loss therefore no capital gains arise;
  • Transfers in the tax years after separation, before the decree absolute is granted, are deemed to take place at market value, irrespective of actual consideration, as the couple is still ‘connected’ for tax purposes. Note the grant of a decree nisi does not alter this position. There may however be reliefs available on the transfer of some assets;
  • Transfers after the decree absolute is granted do not need to take place at market value as the couple is no longer connected, but assets can no longer be transferred at no gain/no loss;
  • Transfers under a Court Order (whenever made) are always deemed to be made at market value.

From a tax point of view, it is therefore simplest to transfer assets between husband and wife or civil partners in the tax year in which a permanent separation takes place, because no tax implications arise. Agreement on how assets should be distributed is often not however reached quickly, and this can be difficult to achieve even where separation takes place early in a tax year; where separation takes place towards the end of a tax year it is likely to be impossible.

In following tax years and until the decree absolute is granted, even where assets are transferred for no consideration HMRC will substitute market value. This is unlikely to have any tax implications on the transfer of the marital home or cash for example, but the transfer of assets such as buy to let property could give rise to capital gains, therefore advice should be taken.

In summary, unless matters can be agreed and dealt with in the tax year of separation, it is likely to prove beneficial to await the decree nisi, or a Court Order before transferring assets.

It’s worth noting that these tax rules relate to permanent separation only; if for example a couple initially separate at Christmas of one tax year but only permanently separate in July of the following tax year, they may not have lost the ability to transfer assets without capital gains tax implications. In this case it would be necessary to demonstrate to HMRC that the initial separation was not intended or expected to be permanent.

 

Exceptions to the tax rules governing separation and divorce

It is quite common for a situation to arise in which one spouse agrees that the other spouse may remain in the marital home for a number of years until the children reach maturity, at which point the house will be sold and the proceeds distributed in an agreed percentage.

At the time of sale of the property, often years in the future, there is likely to be a capital gains tax liability arising on the spouse who has not continued to live in the house as their principal private residence. Where however the agreement has been reached through the courts by way of a ‘Mesher Order’ (in instances involving dependent children) or a ‘Martin Order’ (where no children are involved), the distribution of jointly owned assets can be postponed and no capital gains tax will arise on any gains made between the time of separation and sale of the property.

As is the case with almost every aspect of tax planning, it pays to be prepared. Sadly in the case of a relationship breakdown, by the time a couple come to think about the tax implications of their separation or divorce, it is often too late to minimise the capital gains tax liability. Hopefully this blog will help to clarify the position.

For more information about tax planning if you are concerned about issues relating to separation, please contact Victoria Rampton by emailing vr@rjp.co.uk.

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