Assessing Marital Wellbeing: Should Tax Be A Priority?
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The Covid-19 pandemic was the perfect storm for some couples, with lockdowns and social distancing causing them to spend increased amounts of time together during 2020 and 2021. With ONS data suggesting a decrease in divorces in England and Wales, the divorce rate in the UK is still very high, so should tax be on the priorities list when assessing marital wellbeing?
Adela Cebotaria private client associate tax director at audit, tax and consulting firm RSMcomments
"Whilst 2020 data from the Office for National Statistics suggests a 4.5% decrease in divorces granted in England and Wales in 2020, compared with 2019, the divorce rate in the United Kingdom is still very high, currently estimated at 42%. The figures could mask the reality that many couples split up in the pandemic but have not yet divorced, potentially storing up costly tax consequences.
"Relationships experts warn that the pandemic-induced break-ups are yet to be measured, but reports from the Citizen’s Advice Bureau indicates a rise in divorce enquiries by 122% between July and October 2020, compared with the same period in 2019.
"Having to self-isolate due to Covid-19 often served as the beginning of a trial separation for couples. Experts warn that whilst some couples put divorce on hold post pandemic, the cracks are starting to show and a new wave of divorce cases may be on the horizon.
"Often, married couples and civil partners are not aware that they may have to pay Capital Gains Tax (CGT) on assets transferred to their ex-partner after their relationship has legally ended. The legislation outlines that the ‘date of permanent separation’ is a key date for determining when the spousal and civil partnership exemption ends for CGT purposes.
"As such, when assessing marital wellbeing, tax is generally not on the priorities list, but should it be?
"Whilst it is not typically payable on a person’s main residence, CGT may apply to the transfer/sale of second properties, including holiday homes and buy to let properties. Where one spouse or civil partner leaves the matrimonial home, they may continue to be eligible for principal private relief (PPR), the tax relief available on an individual’s main or only residence, even if they no longer live in the property. There are specific conditions that need to be satisfied for this to apply.
"However, any transfer in the ownership of pension savings is not subject to CGT. For Inheritance Tax (IHT) purposes, transfers between spouses are exempt from IHT until the date of the Decree Absolute is issued. This is similarly the case for civil partners until the date of dissolution. Any transfers after that date could be treated as Potentially Exempt Transfers for IHT purposes, with a potential tax exposure if the donor dies within seven years from the date of the transfer.
"Currently, married couples and civil partners only have until the end of the tax year in which date of permanent separation takes place to transfer assets between themselves if they want to benefit from the exemption to avoid being hit with a CGT bill. The circumstances, such as the pandemic, may have forced former spouses to continue sharing a roof, despite being permanently separated and HMRC will often look at the facts to establish the date of permanent separation for tax purposes.
"The Office of Tax Simplification has recommended to the Treasury that the no gain/no loss rule should be extended to two years from the date of permanent separation. The government has accepted this recommendation, however the change in rules is yet to be legislated. Couples looking to divorce or legally separate in the meantime could be in for a nasty tax shock."