Divorce is often a stressful time and tax is unlikely to be at the forefront of the couple’s minds.
Often the farmhouse is the family home and the centre of the farming operations which adds further complication to an already difficult time.
In this article we look at the capital gains tax (CGT) implications of divorce and the areas to look out for.
CGT implications of divorce and separation
A married couple living together can transfer assets between themselves without a charge to CGT. This tax benefit stops at the end of the tax year in which permanent separation occurs. After this, disposals take place at market value until the decree absolute is granted.
For example, if a couple decide to separate and have a break from each other on 1 January and then decide on 1 April to divorce, by that stage they may have already lost their ability to transfer assets free of CGT, as this will end on 5 April. Therefore, from a purely tax point of view, the best time to separate would be very early in the tax year.
Once the decree absolute is granted, transfers are treated as being on an arm’s length basis, so actual proceeds and not market value are used.
CGT implications for the family home
If the family home has been both spouse’s main residence for the whole time they have owned it, they will be able to transfer it free of CGT. This is due to principal private residence (PPR) relief.
For the spouse who leaves the family home, the house will no longer be their main residence. Therefore, their share of any capital gain will be chargeable to the extent that it relates to the period of non-occupation.
As long as the property was occupied as the main residence at some point during ownership, the last nine months are normally treated as a period of occupation, even if they are not.
Provided certain conditions are met, there is a possible extension to PPR relief on divorce, enabling no CGT to be paid where the family home is transferred after moving out.
CGT relief for farming businesses and assets
If there is a CGT liability on the division of the business, it may be possible to transfer an interest in the business without a CGT charge by claiming gift (holdover) relief for business or agricultural assets.
This means that the recipient spouse would pick up the original cost of the assets when they come to sell them, but there will be no CGT charge at the time of transfer.
Business assets include:
- a sole trader business
- an interest in a trading partnership
- shares in an unquoted trading company (subject to certain conditions)
- Agricultural assets include land and buildings qualifying for agricultural property relief (APR)
The farming partnership
Farming businesses are generally run as partnerships and are often multi-generational with a split ownership of the underlying land and buildings. In most instances, gift relief will be available to reduce any CGT liabilities. Where there is a CGT liability which cannot be covered by relief, the partnership may be able to overcome this by borrowing money to provide a capital sum to the departing spouse, removing the CGT liability.
A family breakdown is an extremely difficult time, and the complication of a farming partnership can make the divorce process even more protracted. A clear and concise partnership agreement which sets out how valuations are undertaken, how and when payments are to be made to a departing partner, should help when agreeing a divorce settlement.