Wealthy people in unhappy marriages should begin to think about what is the best time to end their marriages. An unhappy subject, but alas, an important one, as the authors of this article explain.
The following article is about the unromantic but all too real mix of tax and divorce. Authors Michael Rowlands and Zoe Sive, partners respectively in the family and private client teams at Kingsley Napley, explore some of the latest trends in England and Wales. (Scotland operates under a different legal system within the UK.) As always, while the editors here are grateful for such expert insight, they do not necessarily share all the views of guest contributors and invite readers to respond.
As we leave the winter behind, and with it the trivialisation of divorce by some parts of the media and the frenzy of “Black Monday” and “D Day”, the asset-rich in unhappy marriages should start thinking about when, strategically, to end their marriages.
There is, for the next month, a window of opportunity that will close on 5 April to avoid an immediate payment of capital gains tax on transfers of assets between already separated spouses on divorce; the year of separation is now the focus of the wealthy.
Assets transferred between spouses are generally deemed to be at a no gains/no loss basis and are therefore exempt from CGT unless the couple separates. Once separated, whether under court order, deed of separation or simply in such circumstances that are likely to be permanent, they have until the end of the tax year (5 April) following their separation to transfer assets between them. If they wait until a later date, they may face an immediate CGT liability on the transfer of their assets that form part of the divorce proceedings.
The transfer of assets between spouses in the year of separation avoids CGT liability, so that the transferor will never pay capital gains tax on the inter-spouse disposal. However, for the transferee, this may only equate to a tax deferral until a later sale or transfer of the asset. The transferee takes the asset at its original CGT base cost – there is no uplift for CGT purposes of the base value as at the date of the transfer to the transferee spouse. If and when that asset is sold to a third party, then it is the transferor’s original base costs that is used to calculate the chargeable gain.
There may also be inheritance tax implications in relation to the asset held by the transferee, depending upon the location of the asset and the transferee’s tax status. Nevertheless, this CGT deferral until a later transaction can be of great importance to divorcing couples, as finding the cash to pay the tax on a transfer between them could undermine the settlement and damage living standards.
In addition, CGT may never arise if, for example, the transferee spouse intends to leave the UK, as - subject to limited exceptions - non-UK residents generally do not pay the tax.