Do you need to take steps before the end of this tax year?
On divorce or dissolution of a civil partnership, important timescales apply when considering the potential impact of capital gains tax
On divorce or dissolution of a civil partnership, important timescales apply when considering the potential impact of capital gains tax (CGT). These timescales become even more important as the tax year draws to a close.
Any couples who have separated this current tax year should take immediate advice, and consider whether making transfers between themselves before the end of this tax year (i.e. on or before 5 April 2020), could be beneficial.
A further important consideration this year is that an exemption for the family home (Principal Private Residence Relief) is also being significantly curtailed from 6 April 2020.
Transfers of assets during marriage or civil partnership
Whilst married, or as civil partners, assets can be transferred between the couple without any CGT arising. If one of the couple transfers an asset to the other that has significantly increased in value, no CGT is payable and the receiving party effectively stands in the shoes of the transferring party and is deemed to have purchased the asset at the same time and for the same price that the transferring party originally acquired it for. No capital gain or loss arises.
Transfers of assets after separation
Transfers during the tax year of separation:If the married couple/civil partners have lived together during the tax year in which the separation occurs (where that separation is likely to be permanent) then, before the end of that tax year, that couple can make transfers to each other at no gain/no loss, as would be the position if they had not separated.
So, for example, a couple separate on 1 January 2020. They can transfer assets between each other at no gain/no loss on or before 5 April 2020.
Transfers on or after 6 April of the tax year of separation but before Decree Absolute/Final Order:Once permanently separated, the couple are considered to be connected parties for CGT purposes until the date of decree absolute/final order. The effect of this is that, after the end of the tax year of separation, any transfer is deemed to take place at market value, whatever price (if any) is actually paid, and if the asset has risen in value then CGT will be paid by the transferring party subject to any applicable annual exemption, reliefs or losses. So, in the example above, a couple separate on 1 January 2020. Any transfer of assets between them on or after 6 April 2020 will be deemed to be at market value.
Transfers after Decree Absolute:Transfers after decree absolute will generally be for actual consideration rather than market value (unless the transfer is not at arms-length, which would include any gift).
- It is critical that consideration of the division of assets takes place early in separation and divorce;
- Take legal advice as well as tax advice as early as possible as the tax implications can make a significant difference to a financial settlement.
Principal private residence relief (PPR)
A potentially very valuable relief can be available upon sale or transfer of a dwelling house that has been the owners’ only or main residence. It is very common, when a relationship breaks down, for one of the couple to permanently move out of the family home during negotiations. This can jeopardise this relief unless the potential tax payer is eligible for an extension. The effect of the extension is that, provided the dwelling house has qualified for principal private residence relief at some point during the individual’s period of ownership, the last 18 months continue to qualify for the relief even if during that period the dwelling house is no longer the individual’s only or main residence. However, this extension is being reduced to 9 months in respect of disposals made on or after 6 April 2020. In view of this it is critical to take specialist tax advice, and where possible complete relevant transfers or sales, before 6 April 2020.(Note: a longer period is permitted if one of the parties is disabled, and this is not being amended).
- Consider the tax implications before moving out of your home;
- Be aware of the change in the rules from 6 April 2020 and ensure that this is factored into the decision as to when any of the parties move out and the timing of any sale of the home.
- You may need to act quickly.