New rules could reduce tensions surrounding divorce - Ellen Fell

Yet rules which came into force on April 6 could reduce at least some of the tensions which occur. For the last three decades, there has been an additional pressure which has effectively meant husbands and wives attempting to negotiate a fair financial settlement against the clock. Under the terms of tax legislation which took effect in 1992, spouses have been able to benefit from a brief window relating to any Capital Gains Tax (CGT) liabilities which arise when assets such as the family home, company shares or investments are transferred after their marriages end. Such transfers have been made on a “no gain/no loss” for tax purposes. It hasn’t wiped out any tax bill when the assets in question are disposed of but has been a helpful deferment, easing the squeeze on finances when one household is split in two. Even so, that relief has only applied until the end of the tax year during which a couple separates.

Many separations can be drawn out over weeks, months or even years. That has led some couples to specify a formal date of separation to give them as much chance as possible of capitalising on the tax benefits. In this sense, tax has dictated the timing of some divorces – an approach which might seem to put process above the raw emotions which are a natural part of a marital collapse.

Nevertheless, there are no guarantees that even a relatively simple set of financial affairs might be concluded within the year-long window. That prospect diminishes still further when assets are larger and more complex or when couples split later nearer to the tax deadline. Figures published by the Ministry of Justice only last week show that couples had to wait 67 weeks on average from the date at which a divorce petition was submitted until they obtain their decrees absolute (or their final decrees, as they are known since last year’s divorce law reform).

The Office of Tax Simplification (OTS) recognised the difficulties in May 2021 and recommended that ministers extend the window from its current 12 months to “at least two years after the separation”;. Government agreed and draft legislation originally published last July will apply from today, giving couples three years; CGT relief from the date on which they break up. Relief is indefinite if the terms of any asset transfers are included in a consent order rubber stamped by the family court.

On the whole, it is a very positive development. The significantly longer grace period has certainly removed the possibility of couples hastening to undo their finances to beat the one-year deadline, only to realise the unfortunate tax consequences at a later date.

By Ellen Fell of Hall Brown Family Law