During the emotional upheaval of a divorce, tax considerations are generally the last thing on the minds of those involved. However, by taking advice early in the process, a divorcing couple may be able to avoid unnecessary tax liabilities.
The general rule is that a married couple (or civil partners) who are living together can transfer assets between each other without capital gains tax consequences. These inter-spouse “no gain/no loss” transfers continue to be available for a permanently separated couple only up to the end of the tax year following the date of separation. After the 5th April following their separation, even if the couple are still married, the transfer of an asset between them will be treated for tax purposes as if the spouse who is giving up their interest in the asset has received market value for that interest. This may give rise to a capital gains tax bill if the asset has increased in value since it was acquired.
The occurrence of capital gains tax liabilities will be particularly unwelcome if there are limited cash resources from which to pay the tax. Accordingly, it may be sensible for couples to consider transferring assets on which there are potentially large gains before the end of the tax year of separation, even if an overall financial settlement is still some way off.
Clearly, such decisions are particularly time-pressured where separation takes place close to the end of the tax year. If, for example, a separation takes place in March, the couple would have less than a month to decide whether or not to transfer an asset before the end of the tax year in order to avoid crystallising a capital gain. By contrast, a couple who separate in May would have eleven months to make these decisions; this might well be enough time to negotiate and implement an overall settlement.
In summary, any couple considering separation or who are in the process of separating should take advice on potential capital gains tax liabilities which might be triggered on a division of their assets and how these might be mitigated. This advice should be taken as early in the process as possible.