Divorce and capital gains tax (Should I stay or should I go now?)

The issue

When spouses separate, probably the last thing on their minds is tax. However, a considerable capital gains tax liability can arise when spouses split assets under the terms of a divorce.

The easiest solution is for them to ensure that all their transfers are made in the tax year of separation. That way, they will attract the normal no gain/no loss spouse exemption from capital gains tax. Obviously, in the majority of cases, this will not be achievable. Any transfer made after that crucial 5 April date will realise gains, based on the market value of the assets transferred.

Where business assets are gifted, a valuable deferral relief known as holdover relief can apply to push the gain to the recipient. It would then become chargeable only when the asset is disposed of. Prima facie this offers an alternative relief for those couples making late transfers (above).

Can you have ‘gifts’ in a divorce?

Unfortunately, a transfer under a divorce is not strictly a ‘gift’. Instead the transferee spouse is in reality giving up rights to other financial restitution when accepting an asset. Therefore the value of the asset becomes consideration for surrendering this right, meaning hold over relief cannot apply. However, this point notwithstanding, HMRC’s manuals previously (helpfully) agreed that this relief could apply when the transfer was made under a court order.

Unfortunately HMRC have quietly ripped the rug from under our feet by changing their guidance, citing the more recent court case of Haines v Hill [2007]. They now state that, regardless of whether the transfer is by court order or upon agreement by the individuals, hold over relief will not apply.

Forbes Dawson comment

This is not a change of the law but rather a change of HMRC’s view.

The previous case of G v G [2002] on which HMRC formulated its old stance, states that the parties are not giving up any rights. The argument runs that they do not have any rights to give up, as the powers are all vested in the courts to decide what happens. If this remains correct, then hold over relief should be available where the transfer was made under a court order. Any position taken counter to the guidance should be clearly disclosed in the tax return of the disposing party.

Where large tax liabilities are at stake it would seem sensible to try to divorce (if you would pardon the pun) emotion from financial considerations and carefully time the date of separation. Hostile spouses should perhaps bite their tongues and ‘hang-on-in-there’ until after 5 April (difficult as that may be during lockdown!). They would then have a whole tax year to sort their finances before capital gains tax gets in the way. This issue is only going to become more important when capital gains tax rates inevitably rise.

 

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