As if divorce wasn't painful enough, you could also get hit by the taxman.
There has been much political talk of marriage in recent times, but even more tabloid talk of divorce, so what are the tax consequences of splitting up? Not that Mr Thewlis needs to worry, of course...
Four little words
When talking tax, it is important to realise that different taxes have a different definitions of "We have split up".
Take inheritance tax, for example. You can normally pass assets between spouses in life and on death completely exempt from any IHT charge. You remain entitled to spouse exemption while you are legally married or in a civil partnership, i.e. until a divorce or dissolution is final. This is also the situation in intestacy cases -- a wife may have been estranged from a dead husband for many years but still inherit -- just ask Archie Mitchell…
However, as far as capital gains tax is concerned, it is a different picture.
Capital Gains Tax
For Capital Gains Tax (CGT) purposes, spouses and civil partners who live together can pass assets between each other with no chargeable gain or loss arising. This would include assets such as share portfolios, properties and those valuable antique paintings you think she doesn't know about.
Assets are treated as being transferred at a value that gives rise to no gain, and no loss, which is best illustrated by example:
If Mr Happy Couple decides to give part of his share portfolio to his civil partner, perhaps in order to equalise income and take advantage of two annual exemptions, the capital gains tax computation would be as follows.
| Cost of the shares transferred | £30,000 |
| Market value of shares at transfer | £75,000 |
| Deemed sale proceeds | £30,000 |
So gives rise to no capital gain for the disposing civil partner. The recipient will have a base cost for CGT purposes of the deemed sale proceeds figure of £30,000. The £45,000 gain would only arise if the recipient spouse sold to a third party.
"Living together" for capital gains tax purposes is assumed within couples unless they are separated under a Court Order, by a deed of separation or they are separated permanently.
The no gain/no loss transfer rule described above continues to apply during the tax year of separation only, so for CGT purposes, it is better to separate early in the tax year, providing a longer period in which the transfer of assets can take place without giving rise to CGT liabilities.
You may be wondering why on Earth you would want to transfer assets to an estranged spouse, but it is a fact of most divorce settlements that a certain amount of asset passing will take place.
However, not that HMRC are having their cake and eating it, if a couple have separated, and can no longer pass assets between them without an immediate CGT liability, they are then treated as 'connected persons' for CGT purposes until the divorce is final. In this situation, the value used in any CGT calculation on the transfer of any assets between them after the tax year of separation but before the divorce is final would be market value.
If our couple above decided to separate and under the separation agreement one party was required to transfer an investment property to the other, the CGT computation might be:
| Market value of property transferred | £200,000 |
| Less original cost | £90,000 |
| Capital gain arising | £110,000 |
This means that the person transferring the asset not only loses the value of the property but he will also need to find £19,800 in tax as well (being 18% of £110,000).
The family home
Another casualty of divorce or dissolution is normally the family home. Normally one or both parties will leave the home, and therefore cease to occupy the property as a Principal Private Residence (PPR). If that spouse then transfers their interest in the house to the other, this is a chargeable transaction for CGT purposes.
However, PPR relief is normally available for the last 36 months of ownership regardless of current occupation so 100% relief from CGT should be available provided the sale completes within three years.
Even if the sale does not complete within 3 years, which is still highly possible at the moment, there is a concession which allows full PPR provided that the eventual transfer is part of a financial settlement, is not a sale to a third party, the property has remained the main residence of the transferee, and there has been no election for a different property to qualify for PPR relief.
The downside (because there is always a catch) is that this prevents any other property owned at the same time qualifying for PPR for this same period, if, for example the departing spouse has purchased a new property.
Clearly, if Mrs Cole or Mrs Terry need some tax advice, I would be happy to help…
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