Financially-astute couples should be looking to the start of the new tax year on 6th April to announce their separation and consult the divorce lawyers. Why? To minimise the tax implications upon separation, particularly capital gains tax.
What is capital gains tax (CGT)?
CGT is a tax on capital gains, the profit realised on the sale of an asset that was originally purchased at a cost amount lower than the amount the asset sold for. There is an annual tax-free allowance for CGT, currently at £11,100 for the tax year 2015/16.
CGT and married couples
The assets transferred between married couples are generally treated as though no loss or gain has been made.
This is underpinned by the idea that ‘married couples’ are treated as a single unit, for tax purposes. CGT therefore does not apply to transfers of assets between married couples. While you are married, you can transfer assets to your spouse without any CGT being paid.
Note, however, that there are different tax rules in place for the family home, referred to for tax purposes as the ‘principal private residence’.
How does divorce affect CGT?
The exemption to CGT afforded by marriage comes to an end if the couple splits up. By ‘split up’, the law means that CGT comes to an end in the tax year the couple separates, rather than the tax year in which the couple divorces. The marriage must have broken down: if the marriage has not broken down, but the two do not live in the same house, then they are still treated as being together for the purpose of CGT.
For couples with significant assets, financial settlement can take months – years, even – to reach. From a tax point of view, the more time the couple has to sort out the settlement and the division of assets, the better. To benefit from CGT on transfers of property between spouses, the court order or agreement that the property should be transferred from one spouse to the other must be made before the end of the tax year of separation. It is not enough to state an intention to transfer the property; the property transfer itself will need to be completed within the same tax year period in order to avoid the potential adverse tax implications.
So what does this mean for divorcees?
Well… couples should, if possible, time their separation as close to the start of a new tax year as possible.