Bereavement damages: an award or an insult?
As we leave the winter behind, and with it the trivialisation of divorce by some parts of the media and the frenzy of “Black Monday” and “D Day”, the asset-rich in unhappy marriages should start thinking about when, strategically, to end their marriages.
There is, for the next month, a window of opportunity that will close on 5 April to avoid an immediate payment of capital gains tax on transfers of assets between already separated spouses on divorce; the year of separation is now the focus of the wealthy.
Assets transferred between spouses are generally deemed to be at a no gains/no loss basis and are therefore exempt from CGT unless the couple separates. Once separated, whether under court order, deed of separation or simply in such circumstances that are likely to be permanent, they have until the end of the tax year (5 April) following their separation to transfer assets between them. If they wait until a later date, they may face an immediate CGT liability on the transfer of their assets that form part of the divorce proceedings.
The transfer of assets between spouses in the year of separation avoids CGT liability, so that the transferor will never pay capital gains tax on the inter-spouse disposal. However, for the transferee, this may only equate to a tax deferral until a later sale or transfer of the asset. The transferee takes the asset at its original CGT base cost –there is no uplift for CGT purposes of the base value as at the date of the transfer to the transferee spouse. If and when that asset is sold to a third party, then it is the transferor’s original base costs that is used to calculate the chargeable gain.
There may also be inheritance tax implications in relation to the asset held by the transferee, depending upon the location of the asset and the transferee’s tax status. Nevertheless, this CGT deferral until a later transaction can be of great importance to divorcing couples, as finding the cash to pay the tax on a transfer between them could undermine the settlement and damage living standards.
In addition, CGT may never arise if, for example, the transferee spouse intends to leave the UK, as - subject to limited exceptions - non-UK residents generally do not pay the tax.
The position of the family home, transferred after the year of separation, is slightly different. Where the family home is transferred after the year of separation, principal private residence relief (PPR) will usually eliminate CGT on the gain that accrued whilst the property was occupied as a matrimonial home. However, if one spouse has moved out of the family home and then sells or transfers his or her share of the property after the year of separation, PPR may only be available in relation to the period of his or her occupation plus a further 18 months.
That said, where the transferor is transferring the home to his or her spouse, PPR for the full period of absence may still be available if certain conditions are met including:
Further new rules will apply to CGT for non-UK residents holding UK residential property and to PPR from 6 April, which may make it more difficult in some situations to make a disposal without any CGT liability arising.
The popularity of buy-to-let property portfolios also creates a dilemma of who should have what on divorce, as, for example, PPR will not be available and issues of valuation and the fairest way to carve up the assets can arise.
For those wanting to make sure that they make transfers in time, surprisingly, the all-important date to determine when an unconditional sale of real estate has been made for CGT purposes is not when the transfer is registered at the Land Registry, or even on completion, but when the contract is made - in other words, at exchange.
If the contract is conditional, the date of disposal is the date when all the conditions are satisfied. If the disposal is by gift, disposal takes place on the date when the beneficial ownership passes. To be effective, the transfer must be in the form required by general law for the particular type of asset to be delivered.
Complex families are likely to strategically delay separation, others will use the time to strike bargains. With the threat of tax payable if a settlement is not achieved rapidly, otherwise intractable disputes have the potential to resolve themselves, as if by magic, during the course of the next month. Inevitably, as the deadline approaches, many couples who are focused on preserving wealth and have second thoughts about a winter separation may think differently. Come the spring, and the new tax year - well that really is divorce season.
Should you have any questions about the issues raised in this blog, please contact a member of our team of family and divorce solicitors.
This blog was first published on Wealthbriefing.com, March 2015.
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