The January ‘separation spike’ is well known. A festive period devoid of fun and frivolity can signal the tipping point for some couples. Divorce can be stressful on numerous levels, even when the split is amicable. That’s why you don’t want the additional burden of being unnecessarily penalised by Capital Gains Tax (CGT).
During the emotional upheaval of a divorce, tax is probably the last thing on your mind. But taking advice early is advisable, especially if it helps to avoid unnecessary tax liabilities. Imagine the impact of a substantial tax bill when you are trying to make a fresh start?
For a married couple (or civil partners) who are living together, the general rule is that you can transfer assets between each other without paying capital gains tax, until the end of the tax year following the date of separation.
However, after the 5th April following your separation, these inter-spouse “no gain/no loss” transfers no longer apply. At that point, even if you are still married, the transfer of an asset between you and your partner will be treated, for tax purposes, as if the spouse who is giving up their interest in the asset has received market value for that interest. This could give rise to a capital gains tax bill if the asset has increased in value since it was acquired.
It’s therefore prudent to consider transferring assets before the end of the tax year of separation, even if an overall financial settlement is still to be reached.
Timing is paramount. What if the separation takes place in March? You would have less than a month to decide whether or not to transfer an asset before the end of the tax year in order to avoid a capital gain. Unfortunately, this is just an anomaly of the regulations. Talk about pressure!
By contrast, a couple who separate in May have eleven months to make these decisions, which might well be enough time to negotiate and implement an overall settlement.
In summary, if you are considering separation – or are even in the process of separating – you should take advice on potential capital gains tax liabilities which could be triggered on a division of your assets. You should start to think, as early as possible in the process, about how these might be mitigated.