COVID-19 crisis causes even more problems with Capital Gains Tax
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”).
An important exemption for the family home (Principal Private Residence Relief) is still currently intended to be significantly curtailed with effect from 6 April 2020, meaning that the delays in completing conveyancing arrangements arising from the COVID-19 restrictions could have serious tax consequences for separating parties. The change will come into force when the Finance Bill receives Royal Assent, which, unless postponed, is expected to be in the summer.
Transfer 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 a wife transfers to her husband an asset that has significantly increased in value, no CGT is payable and the husband effectively stands in the shoes of the wife and is deemed to have purchased the asset at the same time and for the same price that the wife 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 a particular tax year prior to separation (which is likely to be permanent), and a transfer is made between them before the end of that tax year (the tax year of separation) then that couple can make transfers to each other at no gain/no loss, as would be the position if they were married. For example, a couple separating on 7 April 2020 can transfer assets between each other at no gain/no loss on/before 5 April 2021.
- Transfers on/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 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.
- Transfers after Decree Absolute: Transfers after decree absolute will generally be for actual consideration rather than market value (unless the transfer is not by way of bargain at arms-length which would include any gift).
- Early consideration of the division of assets after separation and taking appropriate tax advice is critical
- Take legal advice as well as tax advice on separation
- Tax implications can make a significant difference to 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 move permanently 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, provided the dwelling house qualifies for PPR at some point during the individual’s period of ownership then, with effect from 6 April 2020, the last nine month period of ownership (prior to 6 April 2020 it was 18 months) continues to qualify for relief even if during that period the dwelling house is no longer the individual’s only or main residence . It is proposed that the 36 month final exemption period for disabled persons or long-term care home residents will remain.
Effect of COVID-19 crisis
The property market has effectively ground to a halt since the government announced the lockdown restrictions with effect from 23 March 2020. It is as yet very uncertain how long the restrictions will continue. Taking account of the much shorter period of extension of nine months, it is now more crucial than ever for parties to take prompt advice on steps to mitigate its implications and take advantage of any exemption or relief that is available. Even when matters are dealt with by agreement between the parties, it is not unusual for the legal requirements for implementation/transfers to take several months to be implemented. As such, time can be perilously short for the parties to take advantage of the proposed new nine month extension.