When The Chips Are Down And Divorce Is The Only Card Left To Play

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When a marriage breaks down and divorce is inevitable, 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 tax year in which they separate 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 or selling the asset, once outside that first tax year.  And 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.

Even with the best intentions and swift agreement between a couple, it can be a real challenge to conclude financial matters before a 5th  April deadline, particularly for those who separate later in the 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.

In the meantime, as family lawyers we will be keeping a close eye on the progress of these proposed reforms.

Provisions within the Taxation of Chargeable Gains Act 1992 cover the tax position when spouses live together, and when they transfer or dispose of assets on divorce.  While these provide for some relief from capital gains tax, including the exemption for the principal private residence on the primary marital home, the circumstances are limited and can be inflexible in the reality of current-day divorce.

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, whether ‘bird nesting’ – where shared childcare sees parents move between homes, rather than the children – or where a couple agree or are ordered by a court to defer selling the property and dividing the net proceeds of sale until the children complete full time secondary or tertiary education or leave home.

Here to Help

If you need advice on any family matter, please get in touch with Tracey Dargan, Partner and Head of Family and Divorce.

Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.