Capital Gains Tax – timing is everything

Autumn – new school year, change of season, cooler mornings after the hot summer.  A fresh start for many people.

This time of year also marks the half-way point of the tax year.  For those who are thinking about divorce or dissolution, or who have taken the first steps towards divorce or dissolution, this might be a good time to look in more detail at your plans for financial settlement.

This is particularly so for those people who have separated from their spouse or civil partner since the spring, and are going to be transferring capital assets to, or receiving assets from, their spouse or civil partner.  It is important to consider the timing of that transfer.

If you dispose of an asset, such as shares, the tax man regards any financial gain during your period of ownership as unearned income.  In some circumstances you have to pay tax on that gain – capital gains tax.

If you give or dispose of a capital asset to your spouse or civil partner, while you are married or in a civil partnership, there is no capital gains tax to be paid.

But what happens when you split up?  Do you lose that ability when your divorce or dissolution is finalised?

It may come as a surprise to some people to find out that you may lose the ability to pass your asset to your spouse before your divorce or dissolution is finalised.  The clock starts ticking when you separate, not when your decree absolute or final order is pronounced.

You lose the ability to pass your asset to your spouse or civil partner without being liable for capital gains tax at the end of the tax year in which you separated.

How does this work in practice?

Mr and Mrs Wealthy separate in September.  They would have until 5th April to make any CGT exempt transfers.  But in fact, they chose to live apart for two years, and then start divorce proceedings, using the fact that they have been living apart for two years as the grounds for divorce.  Although they have some informal chats about how to resolve the financial matters, by the time Mrs Wealthy sends the divorce petition to court, two years have passed since separation.  They have already lost the ability for Mr Wealthy to transfer his substantial shares portfolio to Mrs Wealthy, as part of the financial settlement, without taking account of CGT. 

Mr and Mrs Wise also separate in September.  Like Mr and Mrs Wealthy, they agree that they will live apart for two years before issuing a divorce petition.  However, Mr and Mrs Wise both consult solicitors at an early stage, and both take independent financial advice.  They attend mediation in respect of the financial settlement, and by the end of the year they have agreed how their financial matters will be resolved.  The solicitors for Mr Wise draw up a Separation Agreement, which is approved by Mrs Wise’s solicitors, and all the financial transfers are carried out before 5th April.  By the time Mr and Mrs Wise come to divorce, two years later, there are no further financial transfers to be carried out, and no CGT to be considered.

Under the terms of their agreement, Mr Wise transferred a number of shares to Mrs Wise.  Mrs Wise’s solicitors also made sure that Mr Wise supplied the details of acquisition dates and purchase price of the shares.  Mrs Wise will need these in the future, when she comes to dispose of the shares, so that her own CGT liability can be accurately calculated at that future date.

We are not financial advisers, and we are not qualified to give you financial advice, only legal advice.  But taking legal and financial advice at an early stage in your divorce or dissolution proceedings may be to your financial benefit!

We offer all new family department clients a free half hour appointment. If you would like to make an appointment, please telephone the office on 01249 444300 and ask to speak to a member of the family team.

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.

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