Pre-budget tax planning in matrimonial cases
A focus on latent tax in capital gains tax calculations
Latent tax in tax planning in divorce cases
In this article our expert, Fiona Hotston Moore, considers whether family lawyers should be considering the impact of the forthcoming Budget.
Latent tax on the transfer of assets is now one of the key tax points to be considered in matrimonial cases. Recent changes to tax legislation mean that capital gains tax (“CGT”) is not charged on a transfer between the parties in a divorce settlement, but the issue of latent tax can be overlooked. Latent tax is the CGT that will eventually be paid when the asset is ultimately disposed of.
I have advised recently on cases where the latent tax attaching to the transfer of two properties of similar market value can be significantly different and this needs to be considered in apportioning value between the parties equitably.
In advising clients ahead of the Budget on 30 October, I suggest considering whether the latent tax should still be calculated based on current tax rates or whether it is appropriate to adopt a higher rate of CGT. We do not have any certainty on what will happen in the Budget, but it seems probable that CGT rates will increase, either with immediate effect on budget day or with effect from 6 April 2025. If the Chancellor wants to avoid a scramble to sell assets over the next six months, it is probable that the increase in CGT will be immediate at midnight on Budget Day. In any event, I suggest that it is reasonable to factor in a potential latent tax increase in calculations that are now underway.
In terms of the likely increase, it is suggested that the government will look to equalise CGT and income tax rates. I think this is unlikely to happen in one budget and a phased approach to increasing tax rates on asset disposals is perhaps more likely.
Residential property
For residential property, it might be reasonable to calculate higher rate latent tax at 28% or 30% rather than the current higher rate of 24%. The pessimistic view would be to assume a 40% CGT rate. In recent instructions as Single Joint Expert, I have prepared calculations based on the current CGT rate and, additionally, at 28% or 40%.
Other assets excluding business assets qualifying for Business Asset Disposal Relief (“BADR”)
Again, it is prudent to consider calculating the latent tax at a higher rate than the current rates. The current rate of CGT on these assets is 20%; a future rate of 30% CGT might be foreseen.
Business assets qualifying for BADR
The chancellor may change this relief, but it seems less likely that it will be reduced or removed in the short term.
Timing of asset sales
If clients are currently making plans to sell assets, it should be remembered that normally the effective date to determine the rate of tax applied to disposals is the date of unconditional exchange and not completion. In other words, if you are concerned that the CGT rate will increase in the budget you should aim to have an unconditional exchange of contracts (not necessarily completion) before the Budget.
Other CGT changes
Finally, other possible changes to CGT would be to remove the 0% tax rate on transfers of shares to employees (used in MBOs and EOTs) and possibly to bring certain wasting assets into charge (e.g. classic cars).
Other relevant taxes
It seems unlikely the rates of income tax will change. However, the rates applied to dividends could be increased to bring the taxation (and national insurance treatment) of dividends in line with employed income. However, I think it is probably premature to bring such changes into current estimates of post-tax future maintainable income.
Conclusion
I suggest family lawyers consider getting latent tax calculations at both current tax rates and also an alternative calculation at a higher rate of CGT in case the Chancellor does move towards equalising income and capital gains tax rates.
Obviously, the potential changes are speculation and I have no crystal ball! So you should always consider getting specialist tax input on specific client matters.
We will be issuing a tax update to our family law contacts directly after the budget. Please let us know if you would like to be added to our database for technical updates and relevant literature.
Getting in Touch
Fee estimates and CVs are readily available. Quotes can typically be provided within two working days.
Email: fiona@fhmforensic.co.uk
Telephone +44 (0)7770 642491
