HMRC recently issued new guidance on their views on reliefs available when transferring business assets on divorce. This could mean larger Capital Gains Tax liabilities ...
HMRC used to say that when couples divorce and business assets transfer between them, Gift Relief would be available to defer any taxable gains on the transfer. This means both parties would have to agree to the claim and any liability would transfer to the individual receiving the asset.
Take, for example, a husband and wife working together in a limited company. They both own 50% of the shares, they separate and the wife stops working for the company. As part of the divorce settlement, the shares are transferred to the husband. On a business worth £1 million, half the shares would be £500,000 which means the wife would have a Capital Gains Tax liability of £100,000 at 20% rate. The tax would be due by the 31st January following the end of the tax year of the gain.
The old guidance HMRC issued means they could have made a Gift Relief claim on the transfer, moving the Capital Gains Tax liability from the wife to the husband if he were to sell the shares in future. Gift relief is designed to ensure people who gift business assets don't suffer a tax charge when they have no cash to settle any liability.
However, HMRC's new guidance has changed that. Citing a case of Haines vs Hill (2007), HMRC now says that assets transferred on divorce mean the transferee (in this case, the wife) is liable for Capital Gains Tax for the value of the shares she transferred to her ex-husband. In our example, she would still owe £100,000 even though she hasn’t received the £500,000.
The actual tax laws around gifting and Capital Gains Tax hasn't changed. It may be worthwhile challenging their view on transferring business assets on divorce if you are in this situation. It's far better to do it at the beginning of a divorce to understand who will owe what, who will be liable for Capital Gains Tax and how much that will be once the divorce has gone through.
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