We reported previously that we see a large increase in the number of enquiries from separating couples in January, particularly on the 8th, dubbed ‘divorce day’.
Over the Christmas period, marriages that are already under pressure can become further strained, resulting in one or even both parties seeking legal advice about divorce in the New Year.
Whilst there may never be a right time to separate, financially shrewd couples should ideally wait until the start of the financial year, being 6th April, to announce their separation and start divorce proceedings. Doing so could potentially minimise the tax implications upon separation and divorce, particularly Capital Gains Tax (CGT).
CGT is a tax on the profit when you sell or dispose of an asset which has increased in value.
Married couples can transfer assets between each other without incurring a liability for CGT. However, many people do not know that when the parties to a marriage permanently separate, this exemption ceases at the end of the tax year of separation – not upon divorce. So, if separation occurs in January, there is very little time to transfer assets between one another tax-free, as the ability to do so would end on 6 April.
There are some exceptions. The former matrimonial home (being the parties’ permanent private residence) will always be exempt from CGT on transfer and a limited category of shares and business assets will also not be affected. However, it is very common for married couples to own rental property or holiday homes and these assets would be potentially liable for CGT, if they have increased in value during the course of the marriage.
Considering the tax implications may not be the first priority for separating couples. However, early legal advice is essential. Separation and divorce can be emotionally and financially damaging enough without also having to line the pockets of the taxman.
For more information on the above, please do not hesitate to contact a member of my team.