Tax and divorce: In this instalment of Stowe guests, we catch-up again with Sofia Thomas from Sofia Thomas Limited.
A specialist tax consulting services to law firms, family offices and high net worth individuals, Sofia has worked in financial service for over a decade and has previously consulted for Google.
“The end of the tax year (5 April 2020) is fast approaching and I am inundated with queries from separating couples who want to benefit from the beneficial capital gains tax treatment by completing transfers before the end of the tax year.
I have compiled a quick list of FAQ about transfers within the tax year of separation.
NOTE: I am not a family solicitor or adviser, I am only writing these notes as a tax adviser
How are married couples treated for capital gains tax?
Married couples who are living together can transfer or gifts assets, including properties between each other with no chargeability to capital gains tax.
This means they can transfer assets under the ‘no gain no loss’ principle.
For example, if Mark bought a property for £100,000 and transferred it to his wife Susan when it was worth £150,000, there would be no gain. However, when Susan sells the property in the future her base cost will be £100,000 (not £150,000).
How does this change when couples separate?
Once couples separate but before the final divorce, they are treated as connected persons. This means that assets are deemed to be transferred at market value. If no elections are made there could be capital gains tax implications for the transferor.
What is the treatment for the tax year of separation?
Couples are still treated as married and not separated until the end of the tax year in which they separate. The tax year runs from 6 April to 5 April.
This means that, if possible all transfers should take place in the tax year of separation. This would mean there are no capital gains tax consequences on transfer.
The actual consideration given on a transfer is ignored. So it does not matter if the asset is gifted or sold by one spouse to the other or by one civil partner to the other.
How is the year of separation defined?
HMRC states that the date of separation is the year the parties stop living together or when a couple has irrevocably separated.
For example, if a couple ceases to live together in June 2019 the period they can transfer assets with no capital gains tax implications is 5 April 2020.
If the transfers do take place in the year of separation what are the tax reporting obligations?
There is no reporting required to HMRC if transfers take place in the year of separation. Individuals should keep records of the transfers and base cost of the assets for up to 6 years.
If there have been any capital improvements to the property ensure the person receiving the property also receives all the relevant documentation, they may need this when they sell the property in the future, any capital expenses can be deducted from the taxable gain.
Before the transfer is done is there anything else to think about?
Even though there are no immediate capital gains tax implications, the person receiving the property may be receiving property with a taxable gain.
For example, Mark and Susan jointly own 2 investment properties; Property A and Property B, they are now both worth £200,000.
Property A was bought many years ago for £75,000 and property B was bought more recently for £150,000
If Mark transfer his half of property to A to Susan and Susan transfers her half of property B to Mark there will be no capital gains tax to pay (if it is done within the tax year of separation). However, they will each inherit the original purchase price.
Susan owns 100% of Property A, current market value £200,000
Mark owns 100% of Property B, current market value £200,000
But, Susan’s property has a taxable gain of £125,000 (being the market value of £200,000 less the purchase price of £75,000)
Whilst Mark’s property has a taxable gain of £50,000 (being the market value of £200,000 less the purchase price of £150,000)
The gain will only be taxable on future sale or transfer, however, it is worth calculating the approximate tax position so each party knows their potential future liability.
What if the transfers take place after the tax year?
If a transfer occurs between you and your spouse or civil partner after the end of the tax year of separation, the transfer will take place at deemed market value. This means the person transferring the asset is deemed to sell it to their spouse for the market value. It is the person transferring the asset who will have a capital gains tax exposure.
So if you separated after 6 April 2019 and are going to complete transfers before 5 April 2020 remember the following:
- Just because there is no immediate tax due to the person receiving the property may also be inheriting a taxable gain.
- If the asset generates income, make sure the receiving spouse knows their responsibilities and registers with HMRC if applicable.
- If the property has had substantial works done, ensure that the spouse receiving the property all receives all the underlying documentation. “
Get in touch
Thank you to Sofia for sharing her knowledge on tax and divorce. You can find out more about Sofia Thomas Limited by visiting the website here.
If you would like any advice on tax and divorce or other family law issues please do contact our Client Care Team to speak to one of our specialist divorce lawyers here.
This article has been published previously and has since been updated.