2020 has as we all know been one hell of a year.
But it’s not just people’s physical and mental health, our NHS, jobs, businesses and finances which have been impacted.
Relationships and families have been hard hit, having been forced to spend months together all day every day without the usual release of school, work or holidays.
While some lucky couples have found a new found love and respect for one another, many others have found the opposite. In fact divorce rates in the first 9 months of 2020 were said to have risen to 33% compared with around 7.5% in 2019, with many specialist legal firms seeing a higher still rise in demand for their services and advice.
Separation and divorce is a challenging and stressful time for all involved, and often the last thing anyone wants to have to think about is the tax implication of any decisions.
Q: What aspects of tax do we need to consider when we’re going through divorce?
A: First and foremost you need to remember that each individual is responsible for their own tax affairs and any capital gains tax (CGT).
While the transfer of assets to spouses are no gain/no loss, meaning that they essentially are exempt from any CGT when they change hands, if a couple separates then this exemption no longer applies after the end of the tax year in which they separate.
So timing is important.
The tax year runs from 6 April to 5 April. So if you officially separate after Christmas, which has always been a peak time for divorce and separation, even up to the 5th of April, if you decide to transfer or split assets on the 6th of April or any time thereafter, you will not be treated as spouses or civil partners for the purposes of tax.
If however you live together at any point during the year you have until the end of that tax year to take advantage of the appropriate allowances and exemptions.
Q:In terms of the family home, if it is owned jointly, what is the position regarding capital gains tax?
A: Spouses are treated as living together for CGT purposes unless formally separated under a court order or formal deed of separation.
Assuming they have both lived in the family home for the entire period of ownership then they will both be entitled to full Principal Private Residence relief (PPR).
For the spouse moving out, upon legal separation they can no longer treat the home as their main residence. This means that the house would need to sell within 9 months to qualify for full PPR.
In addition if either spouse buys another property before it sells, or indeed before the deeds are changed to reflect any change in ownership, then they will be liable to pay the 3% stamp duty surcharge applicable to second homes!
Q: What about if it is only in one name?
A: Any resulting capital gain would fall on the individual who owns the property.
Q: If the couple own other buy to let properties, how are they dealt with from a capital gains tax perspective?
A: If the properties are owned jointly and are to be sold as part of the divorce settlement, then any resulting capital gain will be taxed accordingly on each individual.
If one spouse was keeping any property it would be important to transfer ownership before the end of the tax year of separation to take advantage of the no gain/no loss rule. See above.
Q: What is the tax position regarding businesses where both have a shareholding but only one party runs the business and wants to keep the shares?
A: Again, any transfers should happen before the end of the tax year of separation to take advantage of the no gain/no loss rule. There would also need to be a formal share valuation undertaken. The spouse running the business would need to come to an agreement to buy the shares of the other spouse or possibly restructure to alphabet shares to allow for differing dividend distributions going forward. There are a number of options available here and all advice would need to take into account the individual circumstances. Advice should always be sought when considering the sale or restructuring of shares in a business.
“whilst the no gain/loss rule may well apply in the tax year of separation; there may be a future charge to tax if the receiving party later disposes or transfers their interest. My clients commonly think that any tax is somehow zero rated regardless of when it arises. Equality of division is one thing but equality of outcome can be quite different.”
This article does not constitute advice, and we strongly advise that it is incredibly important to take advice on this subject.
The team at IN Accountancy will be happy to help in respect of tax advice.
Tamsin Caine at Smart Divorce is your go to lady if you require financial advice, or if you simply don’t have a handle on your financial affairs and need help to understand them.