Tax changes for couples who are divorcing or separating.
Tax should not be the main motivation for what you do, but sometimes a little thought and preplanning can avoid paying more tax than you have to. You also have to bear in mind the tax consequences of any proposed financial settlement, to ensure it is fair on both parties.
Some recent changes, particularly to CGT (Capital Gains Tax) may affect divorcing couples. This post assumes a reasonable working knowledge of CGT but the main issue is that transferring assets between a husband and wife who are separating can give rise to a charge to CGT which is payable by the person transferring the asset (or part asset) rather than by the person receiving it. The issue relates mostly to business assets, and investments such as shares, rental properties and second homes because generally speaking a transfer or sale of your home will not result in a charge to CGT. That is because it is likely to benefit from “principal private residence relief” but there are exceptions to that and potential snags and pitfalls.
Transfers which take place before the end of the tax year in which a married couple separate are treated differently from transfers which take place after that date.
There have been some changes to the rules around CGT taking effect from March 2020, which may affect divorcing couples.
The first is a change to Principal Private Residence relief. In general terms the relief does not apply for certain periods when you have owned your home, but not actually lived in it. So for example, if you have rented your house the part of the time you have ended out you may have to pay some CGT on the gain in its value when you sell it or transfer it to someone else, including your former husband or wife, but there has always been a period at the end of your ownership when you are treated as if you have been living in it whether or not that is the case. That period has been reduced to 9 months so this may affect you if you moved out of your family home more than nine months ago.
The second is that the lifetime allowance permissible under Entrepreneurs Relief (which has been renamed Business Asset Disposal Relief) has been reduced to £10 million, which may affect a husband and wife who are transferring business assets between themselves, particularly after the end of the tax year in which they separate.
The third is that the CGT arising from the of a property is payable within 30 days of the transaction, rather than in the January after the end of the tax year in which the disposal takes place, which was the previous rule.
These points form just part of the picture – you need to ensure that you take proper advice about any financial settlement before you proceed with it.
Health Warning :This post is intended as a general guide only – tax is a very complicated subject, and getting it wrong can be very expensive so it is important to obtain expert advice about your own situation, I can certainly accept no responsibility for any loss you might suffer as a result of relying purely on the information on this website.
John Pratley is an expert divorce lawyer, who has more than 25 years’ experience advising clients purely about divorce and related family law issues, such as the financial consequences of separating and divorcing. After establishing the first niche family law practice in Bristol, and going on to senior management roles in a national firm, John set up Apple Tree Family Law in 2018. Apple Tree Family Law solicitors specialise in advice about divorce and financial issues.
We are based in Bristol and Exeter, but we have clients all over the UK and further afield. We offer, simply, clear and accurate advice about divorce and family law issues, and the very best client service, for a clear and reasonable price.