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Red light tax warning for divorcing or separating couples on Tax Day

HM Treasury’s decision to hold a “Tax Day” today will be a bellwether for long-term changes in government tax policy. Traditionally these announcements would have been made alongside the Budget, but this year the Treasury has decided to announce some extra tax rule changes separately. 

In our previous insight we highlighted an “amber” tax alert for couples contemplating divorce or separation. With only a few weeks to go before the start of the new tax year that alert level has increased to “RED”.

In that earlier article we discussed the different tax rules that apply depending on whether a couple are married, separated or divorced. For tax purposes it’s the point of separation (i.e. the point at which a couple are separated under a court order or in circumstances in which the separation is likely to be permanent) rather than the start of the divorce proceedings, that’s the crucial deadline.

Individuals who are married can transfer assets between themselves without any CGT arising. The transfer takes place on a no gain/no loss basis. The recipient is deemed to have purchased the asset for the same price as their spouse paid for it, so no capital gains arises. The tax rules however change when a married couple separate permanently. From this point they are connected parties for CGT purposes until the decree absolute.

Transfers of assets between connected parties are deemed to take place at market value, regardless of the actual proceeds that are paid for it (if any). A chargeable disposal will arise, and CGT will be due (subject to any annual exemptions, reliefs and losses available). The only exception to this rule is that any transfers that arise in the tax year of permanent separation are treated as no gain/no loss. This means anyone who has already separated in the current tax year will only have until 5 April 2021 to take advantage of the no gain/no loss CGT treatment.

Those couples thinking of separation now should seek urgent advice to avoid any unexpected tax consequences.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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