Advice about three issues recurs consistently when family relationships breakdown: all three areas add to delay and costs since they are concepts that force couples into making decisions they’re not ready for; add emotional pressure at the worst possible time or simply don’t chime with their expectations and understanding of what’s fair.
Those three areas are:
- The fault based divorce system which mercifully, after approximately 25years of lobbying by specialist lawyers, changed in April this year;
- Explaining that there is no such thing as a common law spouse – common law marriages were abolished in 1753 and living together doesn’t automatically confer legal entitlement to property etc.
- The scramble in April each year to transfer assets between a husband and wife to take advantage of the “no loss no gain” concession that HMRC afford in the tax year in which a couple separate permanently.
The first one’s been taken off the table by the new law which has already made a significant difference in costs and supporting clients through the crucial issues of financial settlement and arrangements for children.
The second one may never be the subject of legislation because there’s no apparent political will despite The Law Commissions’ various recommendations over the years.
But draft legislation has just been published that may make a significant difference in relation to the third aspect – the race to carry out without prejudice transactions to try to meet a deadline to help with tax planning and cash flow.
Proposals have been announced as part of the draft legislation for the Finance Bill 2022/2023. The current rules provide that divorcing couples can only transfer assets between each other on a “no gain, no loss” basis for CGT purposes if the assets are transferred in the tax year of separation.
If therefore a couple separate in late March, they only have until 5 April to make decisions about whether assets should be transferred in this way. Very often, especially where there are complex assets or shares in a limited company, there simply isn’t enough time to decide whether that’s advisable. If a couple separate on 7 April, they have almost an entire year to consider tax efficient and appropriate fair settlement provisions.
The changes will, if adopted, make a significant difference. They provide for a further three tax years after the tax year of permanent separation to agree transactions or extend it indefinitely in the case of any transfers arising from a formal divorce agreement. In practice most negotiated final settlements are achieved in around 9 to 12 months after separation.
A decision to transfer assets to mitigate tax is not always a straightforward one – whilst the actual transfer won’t give rise to an immediate charge to CGT, there will often be a latent capital gain on any subsequent disposal and that must be taken into account. Nonetheless, having three years to make decisions about tax efficient transfers will feel luxurious to practitioners who habitually draft and negotiate completion of without prejudice Declarations of Trust and Stock Transfer Forms for signature right up until midnight on 5 April in some situations.
Family lawyers will need to make sure that their critical dates diaries record the expiry of the concession period, but if the changes are adopted they will apply to disposals or transfers from 6 April 2023 onwards.
The legislation will be announced or confirmed in the 2022 budget which typically takes place in the Autumn, relieving time critical pressure to make decisions about asset transfers for couples who may be grappling with a very recent breakdown of their marriage.
There are also proposals to amend the existing Principal Private Residence Relief. At the moment, if a co-owner moves out of the family home then after nine months they lose the Principal Private Residence exemption to a CGT charge on any gain and tax will be charged when there is a sale or transfer of the property. The new rules provide that the co-owner who moves out will still be entitled to PPR once the property is sold even for the period of time that they’ve been out of occupation, provided that the sale and absence are connected with divorce.
These generous provisions will help divorcing couples make the money go round, and take the pressure off in terms of decision making at what can sometimes be a difficult time. Watch this space, and listen out for the budget announcements later in the year.