Article written by Atifha Aftab, Solicitor, Family department
When the chips are down and divorce is the only card left to play, tax planning is unlikely to be top of the agenda for many couples. However, failing to transfer assets at the right time may result in unexpected charges for capital gains tax, eating into much-needed capital.
When a couple decide to separate, transfers and disposals made during the current tax year can be on a ‘no gain, no loss’ basis but matters become complex and could involve tax charges on the spouse or civil partner who is transferring the asset, once outside that first tax year. The likelihood of this is rising with financial matters becoming increasingly complex, and many divorces taking longer to complete.
Recognising that couples going through the trauma of separation do not consider the tax implications and timing of asset transfers, the Office of Tax Simplification has recommended that the tax rules be updated to reflect a fairer and more modern approach to separation and divorce.
In response, the Government is proposing to introduce legislation to change the rules for disposals that take place on or after 6 April 2023. The proposed changes would extend the window of ‘no gain, no loss’ transfers and disposals to three tax years after the end of the tax year of separation, or where there is a formal court order with no time limit.
Even with the best intentions and swift agreement between a couple, it can be a real challenge to conclude financial matters before an April deadline, particularly for those who separate later in the year. Being hit with unwelcome, and possibly unexpected, tax bills can turn a difficult situation into a full-blown crisis, when tax may need to be paid but no cash has been realised to do so.
Good planning can help avoid such problems, but this proposal would provide much needed flexibility. It will not remove the need for specialist legal and tax advice, and timing will remain important, but it would be a very positive change.
In the meantime, as family lawyers we will be keeping a close eye on the progress of these proposed reforms, as it may be a good idea to intentionally delay some asset transfers until the proposed new rules take effect.
Provisions within the Taxation of Chargeable Gains Act 1992 cover the tax position when spouses live together, and when they dispose of assets on divorce. While these provide for some relief from capital gains tax, including on the primary marital home, the circumstances are limited and can be inflexible in the reality of current-day divorce. One example is in the different approaches to dealing with jointly-owned property. With house prices continuing to rise, more couples are agreeing to retain the family home until children are adult, whether ‘bird nesting’ – where shared childcare sees parents move between homes, rather than the children – or where a couple agree they will delay selling up and dividing the proceeds until the children leave home.
The proposals would help in this situation, provided the arrangements are in accordance with a court-approved agreement as an ex-spouse or civil partner would be entitled to receive the same tax treatment on any proceeds in the future, as they would have received if the property had been sold or transferred at the time of the separation.