My wife and I separated in December last year and are dividing assets as part of our divorce. We agreed I will transfer my half share in the family home to her so she can sell the property to pay her legal fees and purchase somewhere more convenient to live. She will transfer to me her shares in the family business that my father started. This makes sense in terms of our personal circumstances, but does it make sense in terms of our tax liabilities?
Rebecca Fisher, partner in the private client team at Russell-Cooke, says that, unlike other taxes, capital gains tax (CGT) does not allow for tax-free transfers up until the decree absolute. That is the point in the divorce when the marriage is legally dissolved.
The relevant date for divorcing couples is their separation. This is because transfers between spouses in the tax year of separation are on a no gain/no loss basis. So if you separated in December 2020, you had up to and including April 5 2021 to transfer assets without giving rise to a CGT charge. From that point, there is the potential for CGT on any transfers between spouses.
Sometimes couples come to an early agreement about the division of assets. For most, sadly, it is simply not possible to do so in such a limited time. This can cause additional stress and expense for divorcing couples.
In this case, the tax position depends upon a number of factors for both you and your wife. Not least the date on which the proposed transfers take place, which is the relevant for CGT. The extent to which any CGT exemptions or reliefs apply in your case is also a major consideration.
A valuable relief called principal private residence relief (PPR) applies to your main home for the entire period of your occupation together with a “final period exemption” of nine months. If you have occupied your former home as your main residence for the entire period of ownership, you would have until September 2021 to transfer it without any CGT arising.
This is a complex area of tax law and it is important to get advice tailored to your particular circumstances and occupation history. For instance, the information given here is based on the law in England and Wales, and may not apply to divorces in Scotland and Northern Ireland. I suggest seeking advice if you are based in these jurisdictions.
The shares in the family business will likely have a large gain if they have been held for a long period of time. Historically, HM Revenue & Customs has allowed business asset gift relief on the transfer of business assets on divorce. For example, in your case, you would take the shares back with the gain accrued during the ownership of your wife.
However, HMRC has recently adopted a new practice of not permitting the relief, resulting in divorcing business owners having to fund CGT bills to reorganise the shareholding of the company. This is far from ideal when many couples will not have the liquidity to fund the resulting tax bill.
It is not all bad news. The second report by the Office of Tax Simplification highlighted the CGT inequalities on divorce and made a number of recommendations. Notably, extending the no gain/no loss window to at least two years after separation would, in most cases, allow couples to arrange their finances without additional tax charges. This is by no means law, but it does highlight the direction of travel and hopefully one that would address CGT inequalities.
What happens if my mother refuses to set up a lasting power of attorney?
After seeing coverage of the Britney Spears’ conservatorship case, I’m concerned about my elderly mother who is sadly experiencing diminishing capacity as the years go on.
She does not have a lasting power of attorney (LPA). I worry that my sister, with whom I do not have a good relationship, may object to me putting the powers in place and my mother may refuse to sign under her influence. What would be the consequences if she loses capacity without having an agreement?
Emily Taylor, partner at law firm BDB Pitmans, says reports of the Britney Spears case are extremely concerning, but US and UK law are different.
An LPA is a legal document allowing an individual (the donor, in this case your mother) to give people they trust (the attorneys) the legal authority to manage their affairs if they lack capacity to make certain decisions for themselves in the future.
There are two types of LPA: one for health and welfare; and one for property and financial affairs. When the LPA is signed, a certificate provider also needs to sign to confirm your mother understood the purpose of the LPA, there was no fraud or undue pressure, and there is nothing which would prevent the LPA being created.
The certificate provider will need to be someone who has known your mother personally for at least two years or someone with the relevant professional skills, such as a medical practitioner or a solicitor. If there is any doubt as to your mother’s mental capacity then the certificate provider should be a medical practitioner.
Your mother will need to think carefully about the people she appoints as her attorneys and how this will work in practice. If she wishes to appoint more than one attorney, for example you and your sister, she has a few options. She can either appoint you jointly and severally, which means you can act alone or together; jointly, which means all decisions need to be made together; or jointly in respect of some decisions and jointly and severally in respect of other decisions. Your mother can also appoint replacement attorneys.
If you and your sister do not get on, this could cause practical problems. As your mother’s attorneys, however, you will always need to act in your mother’s best interests.
You mention that your sister may wish to object to your mother making the LPA. She will need to do so under either factual or prescribed grounds. Examples of prescribed grounds include that she believes your mother did not have capacity to make the LPA, there was fraud or that your mother was pressured to make the LPA.
If your mother does not proceed with the LPA and loses capacity, the only option is for an interested party to apply to the Court of Protection for a Deputyship Order. In these cases the deputy appointed is usually a loved one or someone very close to your mother, but it can also be a professional such as a solicitor.
The application can be costly and time consuming. There are numerous forms which will need to be completed including a form to be completed by a medical practitioner to confirm your mother is no longer capable of managing her affairs.
The reality is that if your mother loses capacity and has not made a power of attorney, someone appointed by the court will make these decisions. This is similar to the Spears case and in the US is referred to as conservatorship.
Deputyship applies in England and Wales. Scotland and Northern Ireland have separate regimes for this situation.
In her testimony, Spears said she had been forced to work against her will to use birth control pills, despite her desire to have another child. She said she should not be in a conservatorship if she can work. In the UK a deputy cannot make a decision for the person if they can make the decision themselves.
In the UK, the deputy is monitored by the court. They need to report to the court at least once a year and have in-depth knowledge of the individual’s circumstances. The court can visit the deputy at any time and question them about their involvement. If someone regains capacity the deputyship order ends.
If your mother has not made a power of attorney and loses capacity the court will decide who will manage her affairs.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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