Tax reforms divorcing couples should have in mind
The process of getting a divorce is likely to be a stressful time for separating spouses and the resulting tax implications may not be regarded as the main concern at the time. However, there are several recent tax changes which couples and their advisors should preemptively consider before dividing up the assets or taking steps on separation.
Capital Gains Tax (“CGT”)
To begin with, a key tax liability divorcing couples face is CGT, arising from the disposal or transfer of assets as a result of an agreed financial settlement. Whilst typically not payable in respect of the family home, CGT can be crystallised on the sale/transfer of other assets, such as buy-to-let investment properties. New reforms stipulate that any sale of UK residential property by UK residents, whereby the exchange of contracts occurs on or after 6 April 2020, will require the seller to report the transaction and pay any arising CGT to HMRC within 30 days of the disposal.
Private Residence Relief
In addition, whilst (assuming the relevant conditions are met) the couple’s main home usually qualifies for Private Residence Relief, thereby exempting gains from CGT, from 6 April 2020 this relief will typically only continue to be available on gains arising up to 9 months after the relevant party has ceased to reside at the property. This could be a significant blow to one party where they have moved out on separation at an early stage to reduce animosity following the breakdown of a marriage.
Business Asset Disposal Relief
Moreover, beyond residential property it is not unusual for a financial settlement to include the transfer or disposal of shares in a trading business. As such, assuming the shares are considered qualifying assets under the Business Asset Disposal Relief (the revamped Entrepreneurs’ Relief), parties should still be able to claim the reduced 10% CGT rate. However, as of 20 March 2020 each individual’s lifetime allowance has been reduced from £10 million to £1 million. Gains in excess of the individual’s £1 million lifetime allowance will be taxable at 20%.
New guidance from HMRC suggests that gains on the transfer of business assets between divorcing couples may no longer qualify for Holdover Relief. Historically, HMRC practice and guidance has dictated that divorcing couples can claim Holdover Relief, such that there is no CGT to pay on transfer of qualifying shares and the recipient instead inherits the transferor’s base cost for CGT purposes. The new 2020 guidance indicates that if the shares are transferred after the end of the tax year in which the separation takes place, the transferor will be deemed to have sold the shares for market value and will therefore crystallise an immediate CGT liability in respect of any latent gains. The tax cost associated with any share transfers must therefore be fully understood prior to settlement negotiations.
In addition, couples entering settlement negotiations which have not declared offshore income or gains to HMRC, should be aware of punitive penalties of up to 200% of the unpaid tax.
In-house tax specialists
To conclude, the value of good tax advice during a divorce settlement negotiation should not be underestimated as it could have a material effect in safeguarding each party’s finances following the separation. At Calibrate Law, our Family Law team are supported by experienced Tax specialists who are able to provide assistance when necessary.
This article was written by Nicholas Coward who is a Tax Manager at Calibrate Law and Ben Castle, Senior Family Law Associate. If you are considering divorce or separation and would like to discuss any of the issues featured in this article, please contact Ben Castle, [email protected]
This post is intended to be a guide for clients and other interested parties. The information is believed to be correct at the date of publication but should not be relied upon as a substitute for professional advice. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in these publications.