29 October 2020
The break-up of a marriage is a difficult enough time as it is. Unfortunately, the capital gains tax rules can often make a difficult situation worse.
Gifts of Assets
When one unconnected individual gifts a capital asset to another, the gift is generally treated as taking place at market value for capital gains tax (CGT) purposes. Similar treatment applies to transfers between “connected persons”. However if spouses are living together and one gifts an asset to the other, the transfer is treated as taking place with proceeds equal to the original cost so that no capital gain arises.
Separation and Divorce
When a gift of an asset is made in the tax year of separation assets are still treated as being made at a value equal to the original cost so that no capital gain arises. However, after the tax year of separation the treatment changes and any gift will be treated as having been made at market value giving rise to a capital gain.
Gifts of Business Assets
Where the assets gifted are assets used in a business a claim could be made to treat the transfer as taking place at cost, to avoid a tax charge. Such a claim is referred to as a “holdover claim” or “gift relief”. Gift relief is generally only given if an asset is gifted at less than market value and can be restricted if some form of consideration is given in relation to the gift. Relief can still be given in full however if consideration received for the asset is less than the original cost of the asset. Unfortunately there is no definition of “consideration”. In practice it can include not only cash but non-cash assets.
HMRC’s changing opinion on what constitutes “consideration”
Until relatively recently HMRCs guidance stated that where assets are transferred in the course of divorce proceedings, the spouse receiving the gift should not be treated as having given consideration (in the form of surrendered rights) for the asset and as a result it should be possible for a successful gift relief claim to be made. However, HMRCs view has subsequently changed following the outcome of the non-tax case of “Haines V Hill” and their current view is that when a gift is made in the course of divorce proceedings, the individual receiving the asset can be treated as having surrendered rights that they could otherwise have used to secure alternative financial provision. This may restrict the availability of gift relief on the transfer of business assets as part of divorce proceedings. There is some disagreement amongst advisors and commentators about HMRCs approach. Suffice to say that if business assets change hands during the course of divorce proceedings and a gift holdover claim is made you may need to be ready to defend the position to HMRC in the event of an enquiry. You can read the goverment guidance on this here. If you would like to discuss how the CGT rules apply to your situation, please get in touch with us.
