As we head ever closer to the end of the current tax year, it is vital that all divorcing and separating couples seek professional advice if they are considering a transfer of assets.
For most divorcing couples, tax issues are way down on the list of things to be considered, however, the impact of the tax on the eventual settlement should never be underestimated. By carefully planning the settlement, it should be possible to minimize the tax cost of any transfers between the parties, thus leaving the maximum amount possible for distribution.
Whilst the impact of both income and inheritance tax must be considered, there is no immediate charge under either tax upon the transfer of assets under a divorce settlement. However, there are immediate Capital Gains Tax (‘CGT’) implications.
Spouses are treated as ‘connected parties’ for most purposes in CGT, and this remains the case throughout any period of separation or divorce proceedings until Decree Absolute is pronounced. The basic rule is that up to and including the tax year of permanent separation, the transfer of assets between spouses (eg shares in the family business, investments or property) takes place on a “no gain, no loss” basis because they are ‘connected’. Hence, there is no immediate CGT liability arising on either the transferee or transferor.
However, gains arising on any asset transfers made following the tax year of separation but before Decree Absolute are assessed on the transferor spouse. Therefore, wherever possible, a transfer of assets between spouses, particularly those assets where a CGT liability may arise, should be made before the end of the tax year in which separation takes place.
For those couples who do not separate until after 6 April in any year, they will have up to twelve months to arrange their tax affairs in the most efficient way. However, the tax current tax year ends in just under eight weeks so, for those who have already separated, the opportunity to make the best use of the “no gain, no loss” rule is fast disappearing.
It is worth remembering that post Decree Absolute, former spouses are no longer treated as ‘connected’ and transfers between them are no longer deemed to take place at market value. Gains (or losses) in that scenario are then calculated based on actual consideration received.
Professional advice on this matter should be sought by all divorcing or separating couples as soon as possible.
Suzanne Grant is a member of the firm’s forensic team and has many years of expertise in advising on complicated financial matters arising upon divorce and separation. She can be contacted at our Harrogate office on 01423 532600.