Separation is a difficult process that involves not only emotional but also financial considerations. Recently, the UK government announced significant changes to the Capital Gains Tax (CGT) rules that can have a significant impact on separating couples. Understanding the changes and their implications can help you make informed decisions and avoid unnecessary stress. This blog post provides an overview of the new CGT rules and how they may affect you.
What is Capital Gains Tax, And Why It’s Relevant to Separation
CGT is a tax on the profit you make when you sell or dispose of assets such as property, shares, or business assets. When separating, many couples need to sell or transfer assets to divide their property and finances fairly. Therefore, CGT can affect the division of assets and the tax liabilities of each party. The recent changes to the CGT rules, effective from the 6th of April 2020, have several implications for separating couples.
The most significant change is that the CGT allowance has been increased from £12,000 to £12,300 for individuals and from £24,000 to £24,600 for couples. This means that each person can make a tax-free gain of up to £12,300 in any tax year. However, the increase is relatively modest and may not offset the impact of the other changes. For example, the rates of CGT have been increased for some asset types, such as residential properties and carried interest (the share of profits from an investment fund that is paid to its manager).
Another change is that the CGT reporting and payment deadlines have been shortened. Previously, taxpayers had until January 31st following the tax year of disposal to report and pay CGT. Now, they must report the gain within 30 days and pay any tax due on the same deadline. This change aims to prevent taxpayers from deferring the payment of CGT for several months, which reduces the government’s cash flow. However, it also means that separating couples need to act swiftly and accurately to avoid penalties and interest.
How Will This Affect Me?
One particular concern for separating couples is that the new rules can affect the transfer of assets between them. Previously, transfers between spouses or civil partners were tax-free, as the transfers were deemed to happen at no gain or loss. But now, if the transferred assets exceed the transferor’s annual CGT allowance, the excess may trigger CGT. Therefore, if you are transferring assets to your ex-partner as part of the separation agreement, you need to consider the CGT implications carefully.
Moreover, the changes to the CGT rules interact with other taxes and allowances, such as inheritance tax (IHT) and pension contributions. For example, if you gift assets to your children, you may trigger both CGT and IHT if your estate exceeds the IHT threshold. Similarly, if you withdraw money from your pension fund, you may reduce your annual allowance and trigger a tax charge. Therefore, it is essential to seek professional advice and coordinate your financial plans to minimize your tax liabilities and maximize your financial outcomes.
In conclusion, the recent changes to the Capital Gains Tax rules can have a significant impact on separating couples. While the increase in the CGT allowance is welcome, the increased rates and tightened deadlines may offset its benefits. Moreover, the interaction with other taxes and allowances makes the tax planning process more complex and challenging. Therefore, if you are considering separation, it is essential to understand the CGT implications of your plans and seek professional advice from a qualified tax adviser. With the right guidance and knowledge, you can navigate the tax landscape and achieve a fair and advantageous outcome.
Get in Touch With FMACS
At FMACS, we are experts in resolving couple disputes and helping families come to amicable resolutions across the fields of finance, childcare, and more. Get in touch with a member of our specialist team today on 0330 113 0005.