Capital Gains Tax (CGT) may not be top of your list of concerns when instigating divorce proceedings but not giving it adequate thought could be a costly mistake. The issue is the date of separation. If you separate on New Years Day but can’t settle finances before 5 April CGT may apply to not only property but other assets like shares in a company etc. So the warning is to take care once you’ve decided it’s over to get your timing right. Separate on 6 April and you have a year to haggle!
When you are married, assets can be transferred back and forth between yourselves with no consequences whatsoever. When you are not every transfer attracts CGT on the notional gain made by the transferor. Whilst going through the divorce process you have until the end of the last tax year in which you lived together to transfer assets CGT free. After that, the concession goes.
An example of this would be if you own a second home which you transfer to your spouse as part of your settlement. Assuming the property is worth more than when you bought it, if you transfer it before the end of the tax year there is no problem. However, if you transfer it after that time and you have used up your £11,700 allowance already you will pay 28% CGT on it. Residential property attracts a higher rate of CGT than other assets.
Where there is greater wealth, the likelihood is that that wealth will be tied up in non-liquid assets and CGT will have more impact.
Therefore, if CGT is likely to be an issue then it would be advantageous to delay separating and issuing divorce papers until the start of the tax year (6th April) and give yourself a year to settle the financial aspects.
For further advice on divorce/separation and the financial implications associated with it contact Margaret Porter or Dee Finnegan at Spectrum Family Law on 01279 799598.
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