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/ 10 Jan 2023

Tax traps for separating unmarried couples

Towards the end of last year, the government announced the disappointing news that it had rejected recommendations to reform the law for cohabiting couples. It therefore seems like a sensible time to focus on one of the key areas in which separating unmarried couples are disadvantaged, when compared to divorcing couples.

Whilst we are not accountants, and cannot give tax advice, we must be aware of the tax consequences of agreements reached between separating parties. This can often be something that is overlooked, and the consequences can be significant.

Unmarried Couples – Disposing of Assets

Unlike married couples, transfers of assets between unmarried couples during their relationship are chargeable transfers for Capital Gains Tax (CGT). This also applies on separation, so if assets are transferred in accordance with a separation agreement, the party disposing of the assets will need to be aware that the disposal may attract CGT.

When this relates to the couple’s main property, typically both parties will be able to claim principle private residence relief. This relief applies for 9 months after a party has vacated the property, during which time they are deemed to be in occupation. This relief only applies to your main residence and disposals of any other assets (second properties, investment portfolios, shares, etc) will not attract the same relief.

Married couples who are separating are provided with an additional grace period, which provides that all transfers which take place within the tax year of separation are deemed to be on a ‘no gain, no loss’ basis. From April 2023, this is set to be increased to 3 years. Any disposals which take place during this period will not attract CGT. There is no such relief for unmarried couples.

Unmarried Couples – Acquiring Assets

CGT only applies on disposals of assets, but the party who is acquiring those assets must also be aware of Stamp Duty.

In situations where the parties agree that one party should retain a jointly owned property (often agreeing to take on the mortgage), this will typically mean they acquire a larger share of the property. Alternatively, it may be agreed that a property previously owned by one party in their sole name, is transferred to the other party as part of the overall settlement. This could be on the basis that the other party receives a lump sum for their share in the property, or perhaps, receives another asset instead, to reflect their share in the property. Where there is any consideration for the transfer (including taking on debt, e.g. the mortgage), the person acquiring the property or additional share may potentially have a stamp duty liability to pay. The same rules apply in respect of the threshold and rate of tax due as when a new property is being purchased.

The same applies in respect of shares transferred on separation. This can be shares in a listed company, or, more commonly, shares in a private limited company. Where there is consideration, there is an acquisition that may attract stamp duty.

By comparison, separating married couples are exempt from stamp duty, provided the transfers are pursuant to a court order (or an agreement made in writing, which is made in connection or in contemplation of a court order).

Beware: where the transfer forms part of an overall settlement on separation, with one party receiving X assets, and the other receiving Y assets, it will not be sufficient to say the transfer of shares was a gift or made for no consideration. The exchange of assets will likely be considered consideration.

How can Hanne & Co help?

As ever, it is imperative that advice is sought from an accountant or tax advisor at the earliest opportunity, so that both parties are aware of their respective tax positions. If there is tax due, this can form part of the overall agreement. At Hanne & Co, we have a network of accountants who can assist you on your tax positions, and our specialist family team regularly advise unmarried couples on relationship breakdowns, contact the team today to find out more.

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