New HMRC guidance when transferring business assets on divorce
Capital Gains Tax » July 10, 2020
Are you aware of the recent change in HMRC’s view?
In Brief: HMRC has recently changed their view on Hold-over relief when business assets are transferred on divorce. This could result in a large capital gains tax liability for the person transferring the assets.
Previously HMRC guidance stated that when a couple are divorcing and business assets are transferred between them that Hold-over relief would be available to defer the taxable gain on transfer. Both parties would need to agree to the Hold-over relief claim and the liability would transfer to the person receiving the assets. They would then agree to pay any necessary taxes when the sell the assets in the future.
If we consider Bill and Ben. They own Flowerpot Ltd. They are divorcing and they separated a few years ago. Flowerpot Ltd has a valuation of £1.4 million. Bill and Ben each own 50% of the shares. Ben stopped working for the company when they separated so he is not able to claim BADR (previously Entrepreneur’s relief). As part of the Order Ben must transfer his whole shareholding to Bill.
As they are outside the tax year of separation Ben is deemed to sell his shares to Bill for £700,000 (half of £1.4m). Ben will have a CGT liability of £140,000 being CGT at 20% of £700,000. The tax would be due by 31 January following the end of the tax year of the gain.
Old Guidance
Under the old HMRC guidance Bill & Ben would have been able to make a Hold-over relief claim on the transfer. This claim would remove the immediate CGT liability from Ben. Bill would receive the shares with a latent CGT liability which would become chargeable on future sale of the shares. The claim moves the liability from Bill (transferor) to Ben (transferee). It can be very helpful for individuals who do not have the cash to meet the immediate tax liability on transfer.
It’s helpful to note that the official name for Hold-over relief is Gift relief. It is only available on the transfer of business assets and one reason it is exists is help ensure that people who gift business assets are not suffering a tax charge when they have no cash to settle the liability.
Because the relief is partly there to assist people who do not have cash to pay a liability the relief is restricted if there is any consideration for the gift (or transfer).
New Guidance
HMRC’s new guidance at CG66886 cites the case Haines V Hill [2007] EWCA Civ 1284 which effectively states that where assets are transferred on divorce, the transferee (Ben) is deemed to have paid the transferor (Bill) the market value of the assets being transferred.
Therefore, Bill is deemed to receive £700,000 for the transfer of his shares (valued at £700,000). As there is consideration (all be it deemed) for the gift, the amount of the gain eligible for Hold-over relief is reduced to nil. Meaning that the whole gain is taxable on Bill.
HMRC guidance is not law and there has been no change in the tax law. HMRC’s view is open to being challenged and we may see some challenges to this new view.
Further, HMRC do maintain that in some exceptional circumstances Hold-over relief may be available on divorce. It may be possible to enter in dialogue with HMRC to ascertain if your clients circumstances will count as exceptional. The clear advantages of doing this early on in a case is that any potential liability can be quantified
Talking to clients? See tax advice early on
Given the change in HMRC’s view client’s with business assets will want to ensure they are securing tax advice early on so that they can understand the implications of any transfers.