Major changes to Capital Gains Tax

Current law

The current law states that married couples have until the end of the tax year in which they separate to transfer assets between themselves to avoid paying CGT. Once the tax year is over any transfers taking place between the couple are done at market value. This can cause issues due to the amount of time it often takes to resolve the financial issues on divorce.

Changes

The proposed changes are:

  1. Extending the ‘no gain no loss’ for the whole period providing the couples are transferring assets pursuant to a court order
  2. Allowing non occupying spouses of the family home to benefit from principal private residence relief on sale
  3. Providing additional relief for individuals who enter into a deferred charge arrangement over the main home

Extending the ‘no gain no loss’ window to 3 years from the point of separation or for any period provided the assets are transferred pursuant to a court order

The legislation says that no CGT is payable by individuals in cases where the transfer takes place

(c) before the earlier of— (i) the last day of the third year of assessment after the year of assessment in which A and B ceased to live together, or (ii) the day on which a court grants an order or decree for A and B’s divorce, the annulment of their marriage, the dissolution or annulment of their civil partnership, their judicial separation or, as the case may be, their separation in accordance with a separation order.

Therefore, there is an unlimited period of time for couples divorcing to transfer assets between themselves providing the transfer is pursuant to a court order.

b) Allowing non occupying spouses of the family home to benefit from Principal Private Residence relief on sale

At the moment when one party moves out of the family home, if they are out for more than 9 months they will face a CGT charge when they sell or transfer the property. These new rules allow for that individual to claim PPR on the sale even for the periods that they have been absent from the home providing that the sale and absence is due to divorce.

c) Providing additional relief for individuals who enter into a deferred charge over the main home

At the moment when a party enters into a deferred charge over the main home the charge is a new asset for CGT and when the charge is paid the increase in value is subject to CGT. The new rules allow that party to claim PPR relief on that gain and thereby reduce the liability to nil. Therefore if you are keeping an interest in a family home you would no longer have to pay CGT when you receive the money at some point in the future.

Unclear areas?

The legislation is clear that from 6 April 2023 (if enacted as is) couples separating in 2023-24 will have until 5 April 2027 to transfer assets between themselves without incurring any immediate tax liability. What is slightly less clear is what is the position for couples who say separated in Feb 2022? Currently the position looks as though they had until 5 April 2022 to benefit from the ‘no gain no loss’ rules under current law but if they wait until 6 April 2023 they will then benefit from the new rules and can again transfer assets without incurring immediate CGT

Loans to family Members in divorce

Loans from family members in divorce are often a difficult issue. In many situations parents have gifted or loaned money to their children who subsequently divorce. The way Courts deal with such money in different ways depends on whether these are soft or hard loans. If they are soft loans they are often not treated as repayable.

Factors which may on their own or in combination point the judge towards the conclusion that an obligation is in the category of soft include: (1) it is an obligation to a friend or family member with whom the debtor remains on good terms and who is unlikely to want the debtor to suffer hardship; (2) the obligation arose informally and the terms of the obligation do not have the feel of a normal commercial arrangement; (3) there has been no written demand for payment despite the due date having passed; (4) there has been a delay in enforcing the obligation; or (5) the amount of money is such that it would be more likely for the creditor to be likely to waive the obligation either wholly or partly, albeit that the amount of money involved is not necessarily decisive, and there are examples in the authorities of large amounts of money being treated as being soft obligations

Negotiate Reasonably

A recent case should stand as a warning to those trying to settle their financial issues through the Court. There were 2 issues arising and commented on by the Judge. The first re-emphasised that deliberate non-disclosure by a party of their financial position, even if relatively minor, will be punished by costs penalties, but he has also made clear in this judgment that the parties are required to negotiate once all the facts of the case are known. This decision underlines the fact that it is absolutely crucial for reasonable offers to be made on an open basis once the financial landscape of a case is clear. Not doing so will only lead to punishment by the courts further down the line.

No fault divorce as from 6 April 2022

  • The divorce law is changing.
  • It will keep the sole ground of irretrievable breakdown of the relationship
  • However it is no longer necessary to prove one of the five facts as previously meaning blame is no longer apportioned
  • The divorce language will change, for example:
    • ‘Decree Nisi’ will become a ‘Conditional Order’
    • ‘Decree Absolute’ will become a ‘Final Order’
    • ‘Petitioner’ (the person submitting the application) will become the ‘applicant’
  • It will be possible to have  joint applications where the couple both agree that the relationship has irretrievably broken down (applicants will still be able to submit a sole application if their partner does not agree)
  • It will no longer be possible to contest a divorce, dissolution or separation
  • There will be a new minimum period of 20 weeks from the start of proceedings to when the ‘Conditional Order’ can be made
  • There will still be the 6 week period between the Conditional Order and when the Final Order can be made. This means it could be 6 months from start to finish of the proceedings.

Should you wait?

If you are ready to divorce now, I believe that it is advisable to issue a petition before the change as it may be quicker. Online divorces which are uncontested are currently taking around 3 months. Most of the time parties can agree the grounds for divorce between themselves.

However, for those without grounds or a husband/wife who is going to be unco-operative it would be better to wait as they would not under the new system be able to frustrate the divorce process.

Do you need a pet-nup?

Under English law, pets are considered chattels. In other words, pets are considered property akin to cars, jewellery and furniture. As such, purchase and registration are often considered to weigh heavily in the determination of any dispute regarding who should keep the family pet. That is not to say that those are the only considerations. Other factors which are often referenced as being relevant include:

  1. Who is the pet’s primary carer?
  2. Who has contributed financially to the pet’s food and veterinary bills and how much each partner has contributed?
  3. Whether there is a pre-nup, often termed a ‘pet-nup’, in place. If so what are the terms of the pet-nup?
  4. What are the parties respective financial positions?
  5. Will provision need to be ascribed to a pet, for example a racehorse(s)

In the first instance, it is advisable to consider a pet-nup. A pre-nup/pet-nup is something which is specifically encouraged by the Law Society. Taking such an approach would help to determine the issue via agreement before any breakdown in the relationship and avoid any heartache caused through litigating the issue. Additionally, this approach may help to save costs in divorce proceedings.

No fault divorce

The Key Facts About The No-Fault Divorce Law Changes

Ministers have announced that the Divorce, Dissolution and Separation Act 2020, which will allow married couples to divorce without assigning blame, will come into force on 6th April 2022.

The new law will retain the irretrievable breakdown of a marriage as the sole ground for divorce and it will replace the requirement to specify one of the five grounds for divorce with a ‘statement of ‘irretrievable breakdown’ – thereby eliminating the requirement to administer any blame.

The first change is that divorce proceedings no longer have to be initiated by one partner alone and a couple can make a joint application.

All that will be required is for at least one spouse to provide a legal statement to say the marriage has broken down irretrievably. This statement counts as conclusive evidence and cannot be contested.

The relevant laws on the dissolution of a civil partnership will also be updated. The idea is that broadly the same system and principles, complete with the no-fault declaration of irretrievable breakdown, will apply to both divorce and dissolution.

While the new law will remove some delays (particularly in amicable divorces), it’s not a case of “instant divorce” as the measures have a built-in cooling-off period of a minimum of 20 weeks between the initial application and the conditional order, and another six weeks between the conditional and final orders.

That means that even the smoothest divorce will take at least six months to complete.

Cohabitation Agreements

Cohabitation Agreements

What is a cohabitation agreement and how does it work? Cohabitation agreements are generally entered into between a couple who are not getting married or entering into a civil partnership. It will not affect the legal nature of their relationship. Cohabitation agreements usually concern the ownership of a property. However, don’t write it up yourself and scrawl it on a piece of paper – if you really want to protect yourself, it’s best to get a lawyer. If the document is prepared properly, and both parties have legal advice and understand what they are doing, then it is likely that they will be bound by the agreement.   At the very least it will provide powerful evidence of what the parties agreed and understood when they started living together. If one party has been untruthful or put the other under duress to sign the agreement, a cohabitation agreement entered into in those circumstances would be challengeable in court. There’s another reason for why having this conversation with your partner might be awkward: the money chat. In order for the agreement to be valid, you both have to give full financial disclosure, which means that all your cards will be laid out on the table, including any debt that you might not have opened up to your partner about yet. Be prepared and if you can, have this talk beforehand so there are no unexpected surprises.

Civil Partnerships

Opposite-sex partners can now be legally united in a civil partnership — affording them rights and financial benefits long enjoyed by married couples. Couples often mistakenly believe they are protected by so-called ‘common law marriages’, but these do not exist.

For those couples who do not want to get married, a civil partnership can now provide many of the benefits and tax breaks that a husband and wife currently enjoy.

If anyone in a civil partnership dies without making a will, the other will automatically inherit their estate — including their home if they own it. They will also be exempt from paying inheritance tax.

If you are married or in a civil partnership and do not qualify for a state pension, you may be able to claim part of one based on your partner’s National Insurance contributions.

Workplace pension schemes are legally obliged to offer the same benefits to civil partners as married partners. Some private schemes also have to do this, although it is worth checking with your own provider.

Both civil partners have a right to remain in a home if either of them own it. This is called ‘home rights’. If you end your civil partnership, this may change, depending on what the court orders.

Civil partners, like married couples, can also pass on their home in their estate to their partner if they die — again without facing inheritance tax.

Challenging interests in a family business

In the case of Guest v Guest & Guest a claim was brought by a son for an interest in the family farming business where he had worked for 30 years at a reduced wage. He asserted that he had done this in reliance on assurance that his father had made and on which he said his father should not be able to renege. The son was awarded 50% of the business (after tax) and 40% of the value of the land (which were valued together at around £3.35m.

Therefore it is important not to make promises that someone may rely on to their own detriment and to be very clear what intentions are. Intentions can and do often change over time particularly when relationships go sour.

Challenging nil CMS assessments

If you have had a nil CMS assessment and your partner/spouse had a high income previously then there are things you can do. You can apply for a variation for example on the basis of diversion of income. In order to succeed on this ground for variation the CMS must be satisfied both that your partner/spouse has the ability to control the income that he/she receives and that he/she unreasonably reduced the amount of income they would have received and which would have been take into account by the CMS in their calculations by diverting it to another person or for some other purpose.

As well as diverting sums to a business and taking a lower income, other examples of diversion include paying month to a third party (often a new partner or family member), to a pension scheme or towards other purposes such as using company assets for private use or business funds for day to day expenditure. This would include paying family members from a private company rather than or herself and reducing their own income to nothing,