Shifting assets to a former spouse

The last thing on your mind when you're going through a divorce will be tax, but ignoring this can be costly, particularly when it comes to transferring assets to your ex. But get the timing right and you can easily avoid potential tax bills.

Background

Married couples hopefully build up substantial value in assets together ranging from bank accounts to houses. When these are divided at the end of a marriage there can be tax consequences.

Example

Some years before their marriage ended, Mr A bought a commercial property that he let. As part of usual tax planning wisdom he transferred a half share of the property to his wife who, having no other income, could receive her share of the rent at lower rates of tax.

They separated in August 2005, at which time the property value was nearly £200,000 more than the original cost. As part of the divorce settlement Mr A transferred his share of the property to Mrs A. They agreed to this arrangement in May 2010.

The Taxman demanded nearly £30,000 Capital Gains Tax (CGT) saying that he deemed Mr A had sold his share of the property to Mrs A at market value which resulted in a large capital gain even though he had not received a penny.

Transfers between married couples

Usually, transfers between a husband and wife or between those in a civil partnership are treated as taking place on a "no gain and no loss" (NGNL) basis; therefore, there are no significant tax consequences. But this only applies in a tax year (April 6 to the following April 5) during which they are living together as a couple.

Therefore, if the transfer of an asset takes place after the tax year in which they separated, but before they are divorced, then it is not dealt with on the NGNL basis.

What if no money changes hands?

Even though a couple may be separated they are considered to be "connected persons" by the Taxman until they are divorced, i.e. the decree absolute is issued. Special tax anti-avoidance rules apply to connected persons so that, whether any money changes hands or not, any transfer of assets between them is treated as if it were a sale at full market value.

So, courtesy of the Taxman, poor Mr A paid rather more for his divorce than he had bargained for!

When does a marriage end?

It is vital that a couple considering divorce knows when in the Taxman's eyes he considers them separated.

Tip 1. As cold and calculating as this sounds, if you and your spouse intend to separate, don't do it close to the end of the tax year, e.g. if you separate on March 31, any transfer of assets between you after April 5 but before you are divorced will be deemed to be a sale at market value.

Tip 2. If time is short but you know some of the assets you intend to transfer between you, agree this in a contract by the April 5 following your separation, as for CGT purposes the contract date is the date of transfer.

If you need any more information on tax issues, please get in touch with us on 0191 386 4786 or by emailing information@westwaters.com

Shifting assets to a former spouse

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