When it comes to divorce and taxes, timing is everything.
If you are thinking about separating from your spouse, you may prefer to wait until after 5 April.
A new client came to see me this week and described her family finances. In addition to the family home there are some jointly owned properties, one of which is a villa in Spain. Her husband’s company is worth a tidy sum – even in these recessionary times – and she is a director of that business. She holds 49 per cent of the shares. The couple also owns shares in various quoted companies. These jointly owned assets will have to be divided up between them.
At this point I asked Nick White, who heads our Forensic Accountancy Department at Stowe Family Law, to join our meeting. After he gave our client some very sound advice, I asked him to write up some of his points as a post for this blog.
Here they are:
The UK’s annual tax year runs from 6 April to 5 April in the following year. Unlike business accounting years, the tax year cannot be varied to suit one’s needs.
As with all areas of tax, capital gains tax (CGT) is far from straightforward. For divorcing couples, it is more complicated still. When capital assets such as shares in companies (quoted or private) or property are disposed of, by way of sale, transfer or gift, the disposal gives rise to a “chargeable event”. This can result in a CGT liability for the person who makes the disposal. Specific provisions apply to married couples and to civil partners transferring assets between themselves. These provisions continue to apply during divorce or dissolution proceedings.
Transfers of capital assets between married couples and civil partners result in no immediate charge to CGT – as long as they take place in any tax year during which the parties are living together. For divorcing couples, the key date is the date of separation. Couples are considered to have lived together for the entirety of the tax year during which they separate. This means that as long as any transfer of a capital asset takes place before the end of that tax year, no CGT should be payable. (Note that ultimately, when the asset is finally disposed of by its recipient, a charge to tax will still apply.)
Consider then two couples separating during the same tax year: one couple separates in May and the other couple separates in March of the following year. The first couple has 10 months in which to take advice and consider their options. The second couple has relatively little time during which to consider transferring the assets between themselves, so that the CGT liability can be avoided. Unfortunately their relationship is likely to be at its most stressed during this period; therefore any desire by one party to assume full ownership of jointly owned assets may be viewed with suspicion.
What is more, a March separation gives a small window of a month or less in which the parties must instruct advisors, and in which those advisors must get to grips with the nature and value of the assets in the case. The advisors must also decide if inter-spousal transfers of assets are appropriate, reach agreement with the other side and implement a transfer.
If all of these feats are not accomplished by 5 April, the financial consequences can be substantial for couples with many property assets, in cases in which a transfer of one or more properties from one part to another appears likely.
It isn’t all doom and gloom. In certain circumstances, various capital gains tax reliefs are available, particularly in respect of business assets, such as shares in a trading company.
In short, however, separating shortly before the end of a tax year provides little time in which to consider and implement the most tax efficient arrangements. If in doubt, wait – or seek professional advice at the earliest opportunity.