With the end of the tax year fast approaching it is important for separated couples to consider whether they need to transfer any assets in order to mitigate any potential Capital Gains Tax charges.
Generally, transfers of assets between spouses do not attract a Capital Gains Tax charge as they are considered to be ‘nil gain/nil loss’ transfers. However, when a couple permanently separates, this status changes. A grace period exists during the tax year of separation but as soon as the tax year of separation ends, separated spouses become ‘connected persons’ for the purposes of Capital Gains Tax legislation and transfers of assets after this date are considered to take place at market value and therefore may attract Capital Gains Tax charges.
It is important to note that the year of separation relates to the permanent separation of the parties when the marriage has broken down. It is possible for spouses to live in separate homes without the marriage having permanently broken down and so pinning down the date of permanent separation may not be as straightforward as one might think. Usually, the filing of a divorce petition is going to be evidence of the breakdown of the marriage but of course, the marriage may have permanently broken down some time before the petition was filed. If there is any doubt about the date of a permanent separation, advice should be taken from a tax expert.
If it is clear that if a separating couple is still in their tax year of separation then it is important to consider if any transfers could be made prior to the end of the tax year. In particular, if there are properties or shares which are likely to be transferred between spouses in the future then it may be prudent to make the transfer before the end of the tax year of separation. If a full financial agreement has not yet been reached, it is possible to make transfers in isolation although, of course, both parties will need to agree and cooperate with this. Given the aim is to mitigate CGT charges and therefore preserve the funds available to meet the parties’ needs, usually, cooperation is high!
If you have any concerns about transferring assets prior to the end of the tax year of separation it is important to take advice from a family law solicitor at the earliest opportunity.