Mexit: tax on marriage breakdown
David Whiscombe reflects on relationship breakdown.
As if to remind us that relationships other than that between the UK and the EU also, sadly, break down, the government has announced a change in the law of divorce. No more will a spouse wanting out have to show adultery or unreasonable behaviour by the other side: a statement that the marriage has broken down irretrievably will suffice. (And, of course, for “marriage” read “civil partnership” throughout). Some will regard this as a chipping away at a sacred bond; others as an overdue change to bring relationships into the twenty-first century.
Marriage (and the ending of one) has tax consequences. What follows is a short primer on “Tax and Marriage Breakdown”.
First, to adapt a phrase familiar from that other failing relationship, “marriage means marriage”. For most tax purposes there is no significance in a “common law” marriage or similar informal relationship. There are a few exceptions: for example, the High Income Child Benefit Charge treats a co-habiting partner in the same way as a spouse. But, as a general rule, the taxman treats you as having the same relationship with a person with whom you have cohabited for 40 years as with a stranger you meet on the street: hence the propensity for deathbed knot-tying (such as Ken Dodd’s marriage to his long-time partner last year, two days before he died) to avoid unwelcome charges to Inheritance Tax (“IHT”) on death.
For Capital Gains Tax (“CGT”) purposes, assets may be transferred between spouses on a “no gain, no loss” basis: the donee spouse is treated as acquiring the asset at the same cost (and, usually, at the same time) as the donor spouse did. But this treatment ceases to apply at the end of the tax year in which the spouses separate if the separation is by deed, court order or otherwise likely to be permanent. So if you separated on 1 April 2019, the beneficial treatment lasts until 5 April 2019: if on 6 April 2019, until 5 April 2020. In our experience, remarkably few separations of well-advised people occur towards the end of the tax year.
However, for the period between separation and the ending of the marriage by decree absolute, the spouses remain “connected persons” for CGT purposes. Thus any transfers of assets are deemed to be made at market value, with CGT payable accordingly. Furthermore, if the transfer results in a loss for CGT purposes, the loss is “clogged” such that it is not available against gains generally but can be used only against gains on any other disposals made to the spouse before the marriage ends: which in practice often makes the loss useless.
Separated spouses also continue to be “connected persons” for Income Tax purposes and (in most cases) “associates” as well; so, for example, attributions continue to be made between separated spouses when it comes to establishing control of a company.
A different, simpler, rule applies for IHT. For that purpose, neither separation nor decree nisi has any tax effect: a spouse remains a spouse, such that transfers qualify for exemption, right up until decree absolute. In some circumstances this may offer some tax planning opportunities, though only of course if neither spouse intends to remarry. Also bear in mind that where value is passing from a UK-domiciled spouse to a non-UK-domiciled spouse, the exemption is limited to £325,000.
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We’re delighted that David Whiscombe has been shortlisted in this year’s Taxation Awards for his Outstanding Contribution to Taxation. Voting is open here to all tax professionals until 25 April. We have more information here.