Not really news…. but maybe “News to you”
In this occasional series, we look at things that you might not know but knowing could save you (or someone you know) some money. In this article we look at couples and separation.
Couples and Separation
The average age for a person entering divorce is now 46 for men and 44 for women. National statistics for 2016 (the latest year available) show a 42% divorce rate overall. When a married couple divorce, especially where minors are involved, the first aim should be to maximise the funds available to distribute, before arguing or not over who should get what.
Tax can be a factor here and it is prudent, when you are entering separation, to take suitable advice. Separation is a little different from divorce, in taxation terms physical separation itself does not, contrary to popular belief, mean that the capital gains tax spouse exemption for spouses and civil partners, is necessarily lost.
If a married couple choose to live apart but the marriage has not broken down, they are regarded as “living together” as long as there isn’t a court order or deed of separation in place.
The Detail is Important, Really Important
Let’s get more specific. Barbara (or Barbie as her friends call her) and Kenneth (aka Ken) are married but decide the plastic Ferrari in the garage simply isn’t enough and they need some space.
Barbie owns a flat, just three doors down from their house, and co-owns the house that she and Ken occupy as the marital home. Convenient, eh? In late March 2018 Barbie decides to not re-let the flat and when the tenant leaves she says to Ken “you can stay in it until we decide if we can put up with one another or not”. Ken, with brilliant timing, moves in to the flat on 5th April 2018 but doesn’t get his regular “Back Street Heroes Magazine” re-directed. Tactical, is Ken.
They still get on with one another but enjoy having their own space. Barbie likes to sit at her pink dressing table and look at herself and Ken enjoys trying on some old Action Man uniforms he found in the plastic wardrobe at the flat, that just still fit, despite his now enlarged waist.
But then, in late April 2019, Barbie meets a new gentleman and Ken, a new lady. Barbie spends less time at her dressing table and Ken spends less time with his Action Man outfits. Towards the end of 2019 they decide, having lived a total fantasy up to now, that “this is the real thing” and agree to divorce.
Barbie gives her classic Power Boat (that floats in a bath) to Ken, for free. Ken gives his vintage and highly desirable Harley Davidson (with a built in vroom sound) to Barbie, for free. They are both mad and impetuous fun-loving people and don’t believe in first checking with their tax adviser.
They sign over the boat and bike on 7th April 2020 and get this witnessed by a solicitor because they think they’re being clever.
Their tax adviser, however, has to think about the boring stuff like tax rather than enjoying oneself in a Power Boat or taking the Harley to the Isle of Man TT, so he puts on his serious hat on a Monday morning after checking his business overdraft.
(Divorce is for another day – preferably not a Friday afternoon) but what about this “living together” thing? For the tax year 2017-18, no assets changed hands. Ken moved to the flat, but he is there as Barbie’s rent-free guest.
We would argue that on 5 April 2018 they are definitely still living together even if Ken moved out technically in that tax year. 2018-19 is a slightly more grey area but during that year they were still in their loving, if somewhat synthetic, relationship.
When is ‘Separated’ a split as far as the Tax Man sees it?
The issue here is to decide when they stop “living together”. There is no court order or deed of separation so this is when they are in fact separated in circumstances in which the separation is likely to be permanent.
We’d argue this was when they met their new partners. It was meeting the new man (with a waist) and the new lady (with a dressing table, mirror and lots more) that triggered the decision to divorce. Presumably because they want to marry again and do it all over again only …. Differently.
The year of separation we’d say, was 2019-2020. If assets are transferred during the year of separation, they qualify as tax free, even if that transfer follows the “not living together” moment.
Which, unfortunately, doesn’t help Barbie and Ken. They transferred assets after the “not living together” moment but too late, on 7 April 2020, in the next tax year. Which means that the Power Boat and Harley Davidson (worth a lot more now than when bought) will possibly cost them some tax to pay. Oh, if they’d only signed them over before 6th April!
Honestly, you could write a book about couples’ tax aspects.
Next time, more capers when Barbie and Ken get a divorce.
