One prevalent issue with divorce is the separation of assets from one spouse to another. Although assets can generally be transferred between spouses at no gain or no loss when spouses are still ‘living together’, this treatment ceases after the tax year in which separation occurs.
HMRC treats spouses as ‘living together‘ unless separated:
- under a court order
- by a formal Deed of Separation executed under seal
- in such circumstances that the separation is likely to be permanent
If spouses are not living together, any transfer of assets may incur a chargeable gain or an allowable loss.
Angel and Brodie are married but Brodie left the family home on 31 January 2017, with Angel citing ‘irreconcilable differences’. They decided to split their assets on 1st May 2017. Angel agreed to give Brodie an asset worth £5m at a standing gain of £2m. The transfer would incur Angel a capital gains tax charge of £400,000 and this would be payable on 31 January 2019.
Angel and Brodie should have timed their separation at the start of the tax year as this will give them more time to deal with their affairs and avoid any tax implications. If they had delayed separation until 6 April 2017, they would have had until 5 April 2018 to arrange their finances without incurring a capital gains tax liability.