Divorce can be an extremely stressful time but, as transfers between spouses or civil partners are not charged to tax, you don’t have to worry about that, right? Unfortunately, wrong.
Transfers whilst together
Whilst living together as a married couple or civil partners, transfers are made at no gain/no loss; effectively you take on the original cost.
But once separated, if likely to be permanent, the rules change.
For the rest of the tax year to April 5, the no gain/no loss rules apply. Not much help if you separate late in the year.
After April 5, the ‘connected party’ rules apply; transfers are at market value and charged to tax accordingly. This continues until the decree absolute or final order is made.
The timing of transfers could therefore have a significant impact.
Probably one of the most valuable assets, ‘Principal Private Residence’ (PPR) rules should exempt any gain on the former matrimonial home, as long as it is transferred within 18 months of leaving.
Thereafter, the gain could still be exempt if your former partner still lives in the property. This would however affect the relief on any new home purchased.
Otherwise, the exempt gain will be based on the time it is, or is deemed to be, your PPR, over the total period owned.
It is likely that any family business, company shares or other business assets will be jointly owned. Transfers must be structured so the business is not affected too much going forward and profits can be extracted tax efficiently.
In general tax law, a few reliefs reduce tax on many business assets (Furnished Holiday Lettings included).
If the asset is gifted, the gain may be held over, and the recipient takes on the original cost. Some relief is also available if it is transferred at an undervalue.
This relief also applies for agricultural land, used in a business or not.
Although not an actual ‘gift’, the relief is extended if the asset is transferred as part of a divorce settlement, unless there is a ‘gratuitous element’ (an amount in excess of what would be granted in a contested court case).
If this relief doesn’t apply, the tax rate on any gain could be reduced to 10% from the usual 20% (for gains above the basic rate limit) if there is a withdrawal from the business and Entrepreneurs’ Relief is available.
Also, if not deemed a gift, rollover relief could defer any gain for up to 10 years if any proceeds are reinvested in another business asset.
Investment assets, such as rental (not holiday) properties, cause more issues.
Unless covered by the annual exemption (£11,100 in 2016/17), deferral of gains could be available if a joint property portfolio is split equally, with some relief if the split is not equal. Any tax still due would be at the higher rates of 18% and 28%.
Unfortunately, assets such as quoted share portfolios may be taxable in full.
It may be the last thing on your mind, but consulting your tax advisor as soon as you decide to separate, may save you, as a couple, a significant amount of tax at a time when funds may be at their most strained.