When the chips are down and divorce is the only card left to play, tax planning is unlikely to be top of the list for many couples. But 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 first 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.
Yashin Masoliver, Head of Family says: “Even with the best intentions and swift agreement between a couple, it can be a real challenge to conclude financial matters before the end of the tax year, particularly for those who separate towards the end of said tax 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 won’t remove the need for specialist legal and tax advice, and timing will remain important, but it would be a very positive change.”
Yashin adds: “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 family home, the circumstances are limited and can be inflexible, failing to meet the reality faced by divorcing couples, or those going through dissolution proceedings.
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.
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.
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The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.