The first half of January saw the usual media stories around “Divorce Day”, the idea that the first working Monday of the year sees a spike in divorce inquiries after couples have spent difficult family Christmases together.
The decision to separate is never easy, and it is important for couples to time their separation so as to meet their and their children’s emotional needs. However, couples will also want to be aware of the legal and tax implications of the timing of their separation. Here we consider the potential implications of Brexit and upcoming changes to the rules on Capital Gains Tax (CGT).
The UK will leave the EU on 31 January, but the transition period will mean that the legal position won’t change until at least the end of this year. However, there may be significant changes once the transition period is over which could affect couples with EU connections. Such couples may therefore want to consider formalising their arrangements this year.
Where should I file for a divorce?
The country in which a divorce case is heard can significantly affect the financial settlement, with some countries (including England and Wales) having a reputation for being more generous than others. At the moment, if a couple have relevant connections with more than one EU country, the case will be heard in the first country in which a divorce petition is lodged. After the transition period, this could change, so that the courts in England instead consider to which country the couple have the closest connection. Therefore, anyone looking to secure the jurisdiction of the English courts for divorce proceedings may want to start proceedings in England this year if there is another EU country with which the marriage may be considered to have a closer connection.
What if I have an order in this country and need to enforce it in the EU?
Leaving the EU may also affect the enforcement of English financial orders in EU countries. At the moment, we are part of a regime under which it is relatively straightforward to have an English order for financial provision recognised in another EU state, and vice versa. Any financial orders registered before the end of the transition period are likely to continue to benefit from this regime. Therefore, if a couple has assets in, or one of them lives in, another EU state, they may wish to finalise and register their financial order before the end of the year, in case it subsequently needs to be enforced in the other EU state.
New Capital Gains Tax Rules
Turning to Capital Gains Tax (the tax charged on the increase in value of capital assets, known as CGT), new provisions will come into force on 6 April 2020 which are not helpful to divorcing couples.
The first thing to keep in mind with CGT is that a transfer of assets between separating spouses (such as a transfer of shares from one spouse to another) will not trigger an immediate charge to CGT if the transfer takes place in the same tax year as the parties’ separation. This means that the sooner after 6 April a couple separate, the longer a period they will have to transfer assets between them without CGT becoming payable.
However, it is important to appreciate that transferring assets during this period does not eradicate any CGT liability, but postpones payment of CGT until the asset is eventually sold or transferred to a third party (which may be many years later), which can be very helpful from a cash-flow perspective. This will not generally be relevant to the transfer of the family home, which will usually be eligible for principal private residence relief and therefore exempt from CGT.
Selling or transferring the family home
Currently, if one spouse moves out of the family home, so long as the home is sold or transferred within 18 months of them moving out, no CGT will be payable as it will still be treated as their primary residence for CGT purposes.
However, that is to change on 6 April 2020, after which the period for properties to be sold or transferred will be reduced to nine months. For many divorcing couples, separating, negotiating a financial settlement and implementing it within nine months will not be realistic; meaning some CGT could become payable on the transfer or sale of the family home, in circumstances where previously no such liability would have existed. There is a relief which can be applied for where one spouse remains living in the family home and the other spouse has not purchased a new home, so it will be important to take expert advice and factor any tax liability into settlement discussions.
Payment of CGT for second homes or residential investment property
Another significant change relates to the timing of payment of CGT on the sale or transfer of residential properties. Currently, CGT arising on the sale or transfer of residential property is payable by the 31st January following the tax year in which the sale or transfer took place. From 6 April 2020, the CGT will be payable within 30 days of completion. The divorce settlement will need to be structured so as to ensure that all tax liabilities can be paid when they are due. So, for example, if Zoe were to transfer a residential investment property to her husband Adam as part of their divorce settlement on 31 March 2020, the CGT would be payable by 31st January 2021. If the property were to be transferred a week later on 7 April 2020, the CGT would instead be payable by 7 May 2020. Cashflow is often a problem for divorcing couples, and this change may add more pressure.
There are many issues to keep in mind when considering the timing of separation, financial negotiations, and implementation. If you would like to discuss any of the issues raised above, or any other questions which you may have, please get in touch with one of our specialist family lawyers or give us a call on 020 7412 0050.