Navigating the complex area of tax when transferring assets between couples on divorce is something that myself and the team of family lawyers here at Silk often help clients with.
Changes to capital gains tax law were announced in December that will affect separating and divorcing couples. The changes were also highlighted in partner Margaret Simpson’s blog last week on ‘avoiding the pitfalls of common tax issues’.
In this blog post, I will explore what the changes mean for separating and divorcing couples and answer some common questions about transferring assets on divorce.
Transferring family and business assets on divorce – the “no gain no loss” window
At the moment, current tax rules provide that spouses may transfer assets to the other (property, land) without incurring capital gains tax (CGT), as long as those transfers take place within the tax year following the parties’ separation. This is known as the “no gain no loss” window.
The “no gain no loss” window is a factor easily overlooked when the emotion and other practical matters surrounding separation and divorce are concerned, but an important one for divorcing couples to consider.
In reality, it is often not thought about or considered until advice is taken from an accountant or solicitor, by which time, the tax year following separation can draw ever closer, and end fairly swiftly. This often leaves couples facing a large tax bill they didn’t expect if they miss the “window” for making the appropriate arrangements.
It also means that the point at which the parties officially ‘separate’ has an important bearing upon timeframe for transfer of any such assets to avoid incurring CGT. Couples who separate late in the current tax year are left with less time to mitigate the tax than those who separate early in the tax year.
Capital gains tax and the “no loss no gain window” – what is changing?
A welcome change has recently been drawn to the attention of family lawyers in that the Government have accepted and are to act upon a recommendation of the Office of Tax Simplification (yes this exists!) and extend the ‘no gain no loss’ window to the later of:
- The end of the tax year at least 2 years after the separation;
- Or, any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court (or equivalent in Scotland).
The detail of the extension to the current time period is due to be consulted upon by the Government this year, so watch this space, but it will mean separating couples can consider their options (and obtain tax advice) without the added time pressure the current rules invariably bring.
Answers to some common questions about transferring assets on separation and divorce
What is the definition of the “no loss no gain window”?
During a marriage, and importantly, where those parties are living together (under current legislation, spouses are considered ‘living together’ unless separated by court order, a formal Deed of Separation or “in circumstances where the separation is likely to be permanent”) the transfer/gifting of assets to the other spouse will not incur a CGT charge i.e. it is carried out on a ‘no gain (see above), no loss basis’, and is exempt from capital gains tax if carried out within a specific time period.
The ability to transfer assets between spouses or civil partners on a “no gain, no loss” basis carries on following separation, but only for the remainder of the tax year in which that couple separated. This is known as the ‘no gain no loss’ window. If the transfer occurs outside of this time period, it will be treated as being transferred at market value, and any gain since the acquisition of the asset is taxable.
Is capital gains tax only relevant for people with large assets? What asset value is covered by this tax law?
This is a relevant consideration to all separating couples where ‘gains’ exceed the current exemption level of £12,300 and so is not something which affects the wealthy alone.
My husband and I have recently separated are currently and I am in the process of buying him out of the family home. He is using his share of the equity to buy another home. Will this law affect us? And when should assets be transferred – before or after the actual divorce goes through?
The transfer of interest in a property is a disposal for capital gains tax purposes, and a gain may become chargeable to tax, unless covered by something known as principal private residence relief (PPR). This is an exemption which applies to someone’s main residence.
A sale or transfer of the property to the other spouse must take place within nine months of the transferring spouse leaving the property and it ceasing to be their main residence. This time period is extended indefinitely if the transfer is made under an agreement between the spouses in connection with their permanent separation or divorce. The property must also continue to be the main residence of the person keeping it.
Consideration of tax issues and the timing of transferring assets is therefore key, and it is usually preferable to do so within and by the end of the tax year within which the couple separate. The government changes proposed will therefore significantly reduce the pressure on both parties to potentially rush things through in order to reduce their CGT liability.
When will the proposed changes take place?
An implementation timeframe has not yet been published by the government, but this is a key area of concern for many of our clients and so myself and the team of specialist family lawyers at Silk Family Law will be keeping a close eye on developments and reporting when we know more.
In all cases, we recommend that advice should be taken at an early stage by all separating couples that intend to transfer shares/property as part of the process of dividing their assets.
Image credits: Scott Graham and Romaine Dancre on Unsplash