Blue Monday hangovers

Transfers of assets between spouses or civil partners who are living together take place at no gain and no loss for capital gains tax (CGT) purposes. Under the rules which applied up until 5 April 2023, when couples separated, the no gain/no loss treatment was only available until the end of the tax year of separation. After the end of that tax year, transfers were generally treated as normal disposals for CGT. For couples separating towards the latter half of the year, this may have only given them a matter of days or weeks for the rules to apply and was deemed unfair when compared with couples who separated earlier in the tax year.

The changes in April 2023 addressed this issue and set out an increased period for CGT-free transfers during separation to three years, and an unlimited time if the assets are the subject of a formal divorce agreement. As January is often the most popular time to enquire about divorce, those looking to formally end their marriage in 2024 will be able to take advantage of the new rules. The increased time limits mean that the tax cost of divorce in simple scenarios could be far less than expected.

However, while transfers between ex-spouses are potentially free from CGT, complications can arise where other parties are subject to the transactions. Particularly for family business owners, reorganising the shareholdings to remove ex-spouses can potentially crystallise a now unexpected tax liability. For example, Mrs Jones agrees to give up her 50% shareholding in the family business as part of the divorce settlement in which she receives a cash sum.

One mechanism that will have been used in the past as a tax efficient route is a company purchase of own shares, which, provided certain conditions are met and clearance is obtained from HMRC, can represent a capital disposal by the exiting shareholder. Taking the example above again, before the change of rules in April 2023, this was a tax efficient way of exiting Mrs Jones from the business, as she would be subject to CGT on the gain arising at 20% (or potentially 10% tax if business asset disposal relief was available). As this is a well-trodden path, this may still be the first route considered.

However, with the more generous time limits now available on transfers between spouses, a transfer of assets between the shareholders can now be tax-free. In the case of Mrs Jones, she would now be able to transfer the shares to Mr Jones under the court order, which would be tax-free under the new rules, thereby avoiding a CGT charge entirely.

Where there are significant assets outside the family business, it may be more tax efficient for the disposal to be at shareholder level rather than involving the company. Taking tax advice is still crucial to a fair outcome on divorce so that the hangover from Blue Monday doesn’t last more than a day.