An unfortunate consequence of the coronavirus lockdown may be an increase in divorces. Across society, 2020 has placed a strain on many relationships. We have collectively been spending too much time at home, too little time with others, often with additional financial pressures and the stress of home-schooling children. Many of course have sadly been more directly and seriously affected by the pandemic.
The incidence of marital strain and sadly the rate of divorce are likely to increase. Open and honest conversations, and mediation, can save many strained relationships, but not all. Sadly, we may be called upon to help a number of our clients navigate the business and tax implications of a relationship split, working closely with other advisers including bankers and lawyers. Holistic advice is always needed, to ensure the best outcome. Often we find that our long-term and detailed knowledge of business and personal finances puts us in a key position to advise our clients through difficult times, working alongside the legal teams for each party.
In a farming family the very close links between lifestyle and business, and tensions between income and capital, add to the complexity and strain.
Good, early, advice can also prevent informal interim arrangements being made, which may have adverse long-term implications. Taking advice early, and ideally well before even the outcome for the relationship is known, is key. Rounded advice is needed to balance assets, cashflow, fairness and tax. The task of buying a new home for a spouse who is moving needs careful consideration to minimise Stamp Duty Land Tax and Capital Gains Tax. If assets need to be released from a trust to finance a divorce, there can be Capital Gains Tax and Inheritance Tax costs. Assets within a Discretionary Trust can be considered as part of a divorce settlement if one of the parties has a reasonable expectation of enjoying a benefit from the trust.
Whilst the tax system includes many concessions for married couples and civil partnerships, these generally end at the end of the tax year when the couple ceased living together. For a relationship sadly nearing its end, the Capital Gains Tax outcome is greatly improved if the relationship can continue past 5 April and into a new tax year, compared to a separation in late March. Easier said than done of course, but a break up early in a tax year maximises the time available to sort matters out tax efficiently.
The parties may have agreed the value of an asset, but this may not be acceptable for tax purposes, which normally look at open market value. It is also important to note that the period when a former home can be sold completely free of Capital Gains Tax now ends nine months after leaving it (this used to be three years, then halved to eighteen months, and has now halved again). If any Capital Gains Tax is payable on the sale of residential property, this is due thirty days after the disposal. Don’t forget residential property is taxed at 18% or 28% depending on your income levels.
With a tendency for so many couples to cohabit prior to marriage, the length of the cohabitation can also impact on a potential divorce settlement. “Prenup” agreements are gaining ground as an indication of the
parties’ intentions.
Putting assets into joint names during a marriage is often sensible tax planning to share income and mitigate Income Tax, and Inheritance Tax, and when a mortgage is being sought. But in a divorce, matters can then be more difficult to unpick. We would always encourage our clients to see the bigger picture, and the potential long-term position, when contemplating changes to asset ownership. Early repayment of debt associated with property can trigger early repayment charges.
The new arrangement will hopefully achieve the best long term tax position for all involved, for all key taxes.
In conclusion the best outcome will likely come from taking early advice from a combination of your valuer, solicitor, tax adviser and also potentially your bank manager. Tax advice is key to achieving the best outcome in challenging times. If this brief summary strikes home for you, or your family, the team at Ellacotts will be here to talk you through the decisions you face.
Contact Helen King on 01295 250401 or hking@ellacotts.co.uk for advice, or read more about our farming and agriculture services.
