Given the way in which most decisions to separate from a spouse arise, it is hardly surprising that the majority of divorcing couples do not have the luxury of deciding exactly when to separate. Even fewer couples are likely to give additional consideration as to when in the tax year it would be best to separate. However, the rules on Capital Gains Tax (CGT) do mean that this is something that people should take into account when a separation seems likely.
During marriage, spouses and civil partners are treated as separate individuals but ‘connected persons’ for CGT purposes. Assets transferred between spouses or civil partners who are living together are therefore treated as giving rise to neither a gain nor a loss. Accordingly no CGT arises on such transfers. Any later disposal of the transferred asset is deemed to be sold at a gain on the original cost to the transferor.
This rule continues to apply during the tax year of any separation, divorce or dissolution of a civil partnership as long as the spouses were living together at some time during the tax year. This means that any transfers that take place up to and including 5 April in the year that a couple permanently separates, is also treated as giving rise to neither a gain nor a loss for CGT purposes. However, if the transfer takes place after 5 April then it will give rise to an immediate charge to CGT on the transferor who will be deemed to have disposed of the asset at market value. The transferee’s base value for CGT going forward then becomes this value.
Clearly, in certain cases the creation of an immediate charge to CGT complicates matters substantially, particularly if there is limited liquidity. Accordingly, it may in those cases be sensible for couples to consider getting on with transferring assets pregnant with CGT to whichever one of them is likely to end up with the asset eventually, even if an overall financial settlement is still some way off. This is particularly the case where separation takes place close to the end of the tax year.
If, for example, a separation were to take place in March, a couple would have a month or less to decide whether or not to transfer the asset in order to avoid crystallisation of the gain on transfer. By contrast, a couple who separated in May would have eleven months to decide. This might well be enough time to negotiate and implement an overall settlement.
Accordingly, any couple who is considering separation or is in the process separating should consider and take advice on potential CGT liabilities and how these might be mitigated as early in the process as possible.