As many people will have paid their tax by the 31 January deadline, I think it timely to look at issues relating to tax arising on separation and divorce.
When considering a financial settlement between divorcing or separating couples, it is vital that the tax consequences of any agreement are properly examined and fully understood. It would no doubt come as a very unwelcome surprise to learn that there is a tax charge which was not considered when the agreement was reached.
The “no gain, no loss” window for transferring assets on divorce
Transfers of assets between spouses can be made without a capital gains tax charge if these transfers take place during the marriage – or within the tax year of separation. If the transfers take place after the tax year of separation, there may well be a charge of capital gains tax on the disposal or transfer of the chargeable asset. Accordingly, the closer to 5 April the parties separate, the less chance they have of re-arranging their financial affairs in a tax efficient manner.
Many advisors believe that provided the marriage has not been formally dissolved by way of pronouncement of the Decree Absolute, transfers of assets can still take place between spouses at the nil rate. This is a myth and care should be taken to ensure that you obtain the correct advice.
The family home and capital gains tax on divorce
When a marriage breaks down it is usual for one party to leave the family home. If you do so – and remain absent from the property for some time before it is sold or transferred to your spouse – your share of the gain upon ultimate settlement may not qualify for full private residence relief for Capital Gains Tax (CGT) purposes.
From April 2020 the exemption from CGT on the final period of ownership of your home was shortened from 18 months to nine months. Therefore if you sell a property after having lived away from it for more than nine months, CGT could be payable. If the property has been your main (principal) residence for part of the time you have owned it, then the capital gain you make will be apportioned over the whole period of ownership.
However, this period is due to be reviewed and the “no gain, no loss” window allowed for divorcing couples to transfer assets (including residential home ownership) to one party without paying capital gains tax will be extended again from nine months to two years from April 2022. My colleague family law associate Nia Jameson will be exploring the new rules in more detail in next week’s blog post. You can also follow Silk Family Law on Twitter and LinkedIn for updates.
Transferring business assets on divorce – Business Asset Disposal Relief
In terms of business assets, it is important to be aware of the relief that may be available to you upon transfer of shares in a family company or farming business from one spouse to the other. Care must be taken in any financial settlement to ensure that the relief properly available to you and your spouse is maximised. If Business Asset Disposal Relief is available, it means that you pay tax at 10% on gains on qualifying assets. To enable you to take advantage of such relief certain criteria need to be met. First, the company’s main activities must be in trading (rather than non-trading activities e.g. investment). You need to be an employee or office holder of the company and (depending on the type of company) you must have at least 5% of the shares and voting rights in the company. In addition, a lifetime limit for this relief was introduced in 2020. Business Asset Disposal Relief can be very valuable and again, care must be taken to ensure that all reliefs are properly secured to maximise the value of the assets available for distribution on divorce.
This is often a complex area of law and advice from a solicitor who is experienced in dealing with these issues is crucial.
Margaret has significant expertise in farming and landowning cases, you can contact her on 01748 900 888 or visit www.silkfamilylaw.co.uk.
Image credit: Scott Graham on Unsplash.