Making sure a break-up doesn’t break the bank

Divorce can be very painful at many levels. That’s why you don’t want the additional burden of being unnecessarily penalised by Capital Gains Tax (CGT), writes Mark Sheen.

During the emotional upheaval of a divorce, tax considerations are generally the last thing on your mind.  By taking advice early in the process though, you 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 paying capital gains tax, until the end of the tax year following the date of separation.

After the 5th April following your separation, these inter-spouse “no gain/no loss” transfers no longer apply.  At that point, even if you are still married, the transfer of an asset between you and your partner 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.

Of course, if you have limited cash resources, the CGT can be particularly unwelcome.  It’s therefore a sensible idea to consider transferring assets before the end of the tax year of separation, even if an overall financial settlement is still some way off.

But what if the separation takes place in March?

You 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 a capital gain.  Unfortunately, this is just an anomaly of the regulations and does indeed create a lot of pressure.

By contrast, a couple who separate in May have eleven months to make these decisions, which might well be enough time to negotiate and implement an overall settlement.

In summary, if you are considering separation – or are in the process of separating – you should take advice on potential capital gains tax liabilities which might be triggered on a division of your assets. You should also start to think, as early as possible in the process, about how these might be mitigated.