With many people having paid their tax by the 31 January deadline, I think it timely to look at issues relating to tax arising on separation and divorce.
In considering any 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 taken into account when the agreement was reached.
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 financial year of separation. If the transfers take place after the financial year of separation, there may well be a charge to 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 dissolved upon 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.
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 CGT purposes. From April 2014 the exemption from CGT on the final period of ownership of your home was shortened from 3 years to 18 months. Therefore if you sell a property that 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. The part relating to the time it was your main residence is exempt from CGT together, with the last 36 months of ownership, whether or not it was in fact your main residence during that final period. Accordingly, there may well be a CGT charge if you left the family home several years earlier.
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 entrepreneur’s relief is available it means that you pay tax at 10% on all gains on qualifying assets. To enable you to take advantage of such relief certain criteria needs to be met. First, the company’s main activities must be trading. You need to be an employee of the company and you must have at least 5% of the shares and voting rights in the company. It is a very valuable relief and again, care must be taken to ensure that all reliefs are 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.
This blog first appeared as Margaret’s monthly column in the Yorkshire Post’s Country Week supplement (link to YP).
Margaret has significant expertise in farming and landowning cases, you can contact her on 01748 900 888 or visit www.silkfamilylaw.co.uk. You can follow Silk Family Law on Twitter @Silkfamilylaw