The Mishcon Academy Digital Sessions. Conversations on the legal topics affecting businesses and individuals today.
Annie Bouch, Associate
Mishcon de Reya
In this episode, what are the upcoming changes to capital gains tax and what impact will they have on divorce? When is a good time for family lawyers to think about tax and financial planning on divorce? And what other planning opportunities might a divorce present?
Hello and welcome to this Mishcon Academy Digital Sessions podcast. I am Annie Bouch, an Associate in the Tax and Wealth Planning team at Mishcon de Reya and I’m joined by my colleague, Antonia Felix, a Partner in the Family team and we’re talking with Ben Glassman and Chris Springett at Evelyn Partner. Ben is a Financial Planning Partner and Heads the Family and Divorce team at Evelyn Partners and Chris is a Partner in the Private Client team at Evelyn, where he specialises in capital gains tax.
So, I think the best to place to start is, what really are the current capital gains tax rules for married couples and civil partners on divorce? Chris, could you tell us more?
Chris Springett, Partner
Evelyn Partners
Yeah, thanks Annie. I think it’s fair to say that it often comes as a surprise to couples on divorce that tax does need to be considered. People are often aware that transfers between a husband and a wife don’t attract tax but are unaware that this is due to a specific set of rules that have certain conditions that need to apply. A transfer between spouses takes place at something called no gain, no loss for capital gains tax purposes. This means that no tax is crystalised on the transfer and the receiving spouse effectively takes the other spouse’s base cost. However, this special rule for spouses only applies up to the end of the tax year of permanent separation so, for example, if you were to separate in December, you’d only have to the 5th of April to make use of that spouse exemption before it falls away.
Antonia Felix, Partner
Mishcon de Reya
As a family lawyer, we find that people come in, obviously they don’t think about tax when they separate and they come to see us at different times in the tax year and sometimes that means they don’t benefit from that no gain, no loss CGT treatment, which is often a shame.
Annie Bouch, Associate
Mishcon de Reya
That’s really frustrating, I can imagine, they come to you on the 1st of April, you’re thinking great, we have four days but you can’t really control what you’re doing there.
Antonia Felix, Partner
Mishcon de Reya
No, it’s really difficult.
Annie Bouch, Associate
Mishcon de Reya
But actually the, the Government are introducing new proposals from April 2023 that extend the no gain, no loss treatment. So, currently, as Chris mentioned, where a divorcing couple can only benefit during the tax year of separation, this is being extended to the area of divorce or three years following the end of the tax year of separation. So, really, no longer are couples that separate towards the end of the tax year disadvantaged in comparison to couples separating at the start of the tax year, which I think is probably a welcomed news for a family lawyer.
Antonia Felix, Partner
Mishcon de Reya
Definitely, it is.
Ben Glassman, Partner
Evelyn Partners
Has this happened to you guys then, you’ve had, you know, couples in and you’re, you know, you’re thinking actually, we haven’t got the time here or there is significant tax that’s going to end up being paid here because they’ve just got divorced at the wrong time of the year?
Antonia Felix, Partner
Mishcon de Reya
Yes, exactly and that’s when we work with Annie’s team to try and work out the best way of dealing with it.
Ben Glassman, Partner
Evelyn Partners
So, are you potentially deferring that settlement, as a result, just trying to, if it’s closer enough, you say look, you might want to wait here, you know, two, three months.
Antonia Felix, Partner
Mishcon de Reya
Yes. Exactly. It depends where they are because some people don’t want to plan their life via tax so they’ll just…
Annie Bouch, Associate
Mishcon de Reya
Understandably.
Antonia Felix, Partner
Mishcon de Reya
Yeah, so they’ll just say well that’s fine, understood but we’re going to, you know, carry on and others will, yeah, will definitely defer the negotiations and wait, even by a couple of weeks because of the dates.
Ben Glassman, Partner
Evelyn Partners
Yeah, that seems fine where it’s a couple of weeks but where it’s like several months, it seems ridiculous.
Chris Springett, Partner
Evelyn Partners
You know, it is really welcome that the Government are looking to make these changes then?
Annie Bouch, Associate
Mishcon de Reya
Absolutely and I think what’s really important at the moment is that we’re actually in a transitional period so, if we have a couple that separated in 2021/22, so that’s between 6 April ’21 and 5 April ’22, they are currently the current rules that Chris explained so, they are now past their tax year of separation so, if they transferred assets now that would be deemed to be at market value and there could be a tax crystallising depending on what the asset is. So, it’s really, really important to get advice because we’d be saying to that type of divorcing couple, actually, hang on, hang on until these new rules come in, in April 2023 because there could be some planning opportunities here but likewise, if you have a couple that are in the current tax year of separation, so since 6 April 2022, the benefit for Antonia’s team is that we’re going to reach 5 April 2023 and there won’t be this huge rush to try and obtain this no gain, no loss treatment because we can say to divorcing couples actually look, you will benefit from this extended period so, I do think that there is a lot of planning that needs to be had but actually, this is welcome news and it’s just we need to take a step back and think okay, when has this separation occurred because we need to look at the current and new rules.
Chris Springett, Partner
Evelyn Partners
I think alongside the changes to no gain, no loss, there’s also some changes to the main resident’s relief from capital gains tax that’s probably also worth noting and hopefully again, helpful for Antonia’s team. So, as people might be aware, the family home is exempt from capital gains tax but again, it’s under a set of specific rules rather than just a general allowance. The specific rules cover certain periods of absence from the property and one of those is on divorce but it’s actually quite limited in that it only really applies so you only get that exemption when you transfer the property to the remaining spouse, so if you are the spouse that’s moved out, transfer the property to the spouse that’s remained in the property, then you can qualify for some extensions to the Private Residence Relief rules. Under the new rules that will be introduced again from 6 April ’23, you’ll actually be eligible for Private Residence Relief on a sale to a third party if that is part of a divorce settlement, you might need to consider whether it’s worthwhile for you to do that so if you’ve acquired another property, it might not be in your best interests to claim it on the former matrimonial home but, as I say, it gives you that flexibility that perhaps isn’t currently present in the existing system so, again, more changes coming through that are hopefully helpful for Antonia and her team.
Antonia Felix, Partner
Mishcon de Reya
Definitely. It just gives people more breathing space rather than thinking they’ve only got a short window to make the decisions and it often means that people end up implementing an agreement before it’s gone into a Court order because they want to make the timings work for them.
Annie Bouch, Associate
Mishcon de Reya
But I think with these new rules, the immediate reaction is great, we get no gain, no loss for a much longer period but actually, that doesn’t mean there’s no tax to pay, it just means that that tax charges is potentially being crystallised unless PPR perhaps applies so, I think I would say when family lawyers are looking at sort of the divorce and financial negotiations, actually the recipient party who’s receiving the asset, they really want to be thinking about some sort of tax indemnity or knowing that the dry tax charge that could apply at a later date and getting that built in now because it could be too late in the future.
Antonia Felix, Partner
Mishcon de Reya
Yeah, and it’s helping them understand that there will be a tax charge because so often, they think oh, fun getting it tax free and they don’t understand that at some stage, there will be a penalty to pay.
Ben Glassman, Partner
Evelyn Partners
A quick question for you Chris, we’re in this environment where interest rates are obviously rising and looks like house prices are coming off. How is that going to impact divorcing couples with the potential change of legislation?
Chris Springett, Partner
Evelyn Partners
Yeah, that’s interesting Ben actually because, you know, we think about needing to protect the assets from capital gains tax but you’re right, if there’s no gain to start with then that also adds some flexibility around how people might deal with a financial settlement on divorce. There are lots of good ideas out there around ways to protect either party in that divorce and allow them access to those assets and the value of those assets over time. I’m thinking things such as a trust structure or things such as even a deferred charge so, you transfer the property now but you take a charge over the future sale proceeds. All of those bring with them tax consequences and issues to consider but actually could give you a really good result particularly if the tax is such that the gain isn’t there to start with. So, I think it opens up a lot of opportunities to plan actually for the right settlement rather than just a tax efficient one.
Annie Bouch, Associate
Mishcon de Reya
It’s interesting as then we’ve spoken a lot about capital gains tax and timing on divorce and during divorce, a client might not be thinking “ooh I should update my will” but absolutely I always say to Antonia and her family team that when you’re going through a divorce, actually updating your will, your testamentary documents, is absolutely the time to be doing this because like with CGT, the rules change on divorce the same as with inheritance tax and so you want to be looking to ensuring that you have a tax efficient will as possible and also build in the provisions that you planned for during the financial negotiations on divorce but that got me thinking, Ben, when should the parties be considering financial planning in the context of divorce?
Ben Glassman, Partner
Evelyn Partners
I mean, just like you guys, we find that separating clients often come to us quite late in the process. So, as planners or tax advisors, we tend to get involved or invited to get involved when something has gone wrong or something seems a bit complicated or how do we untangle this particular issue. Some of the most effective planning can be undertaken much earlier in the process. So, as an example in the bit that I often talk about, I mean divorce is one of the only times that pensions that are able to be shared. The only other time really is sort of on death so, it’s only a, you know, it’s a by-product of the divorce process that you can actually share debit or credit pension assets from one party to another and why can that be useful? Well, pensions are a really useful tax structure in particular and the current legislation on certain types of pensions are that they are outside of the estate for inheritance tax purposes and so when we’re thinking about generating an income in retirement, perversely we tend to avoid spending pension assets, it’s actually the pensions that spend last rather than the ones that you spend first because anything left within the pension can be passed onto future generations free of any inheritance tax. And with all these really, you know, good benefits associated with pensions there are limits on what one can put into a pension. So, if there are couples with large, large pensions as part of the matrimonial estate and one party has limited resources, there are joint benefits of sharing those assets between them. Not only can you reduce these horrible lifetime allowance tax charges because effectively now you’ve got two allowances rather than one, you can also remove assets from the estate, so it’s two sets of tax charges just by thinking strategically but very often, the opposite takes place, you know, it’s one party might prefer to keep the house and the other party, you know, might want to keep their pension and this is really dangerous as a pension can be undervalued relative to the value of a pension, particularly if it’s a final salary pension or a civil service pension. I mean, what about you guys. Antonia, do you find that one party in the divorce is more wedded to the property over their pension?
Antonia Felix, Partner
Mishcon de Reya
I do, yeah, so often and I’m stereotyping here but it is the female in the relationship who possibly wants to keep the family home because maybe they’ve got children and they think that it will be more settling for the children to stay in the family home a bit longer or they just feel more wedded to the property and so often they come and they say well if I keep the property, he can keep the pension but I think where it’s really important to work with people like Ben in the early stages, is because women often have less in their pension pot – for lots of different reasons, which would be a whole different podcast – but there’s the gender pay gap and often women will take longer maternity leaves or parental leave and come back working part-time so, over the years, they would have contributed less to their pension so, often, on divorce, their pot is lower and I think psychologically for a woman, they’ll think oh well I’ll keep more of the cash from the equity in the property and take less pension but as you’ve just said, there’s a lot more to think about beyond that and also women have a longer life expectancy, they might be younger than their husband so, when you are looking at a settlement, you have to be really careful at looking at all of those different contributing factors to see actually what the outcome will be for them and often the pension just feels alien compared to a property.
Annie Bouch, Associate
Mishcon de Reya
It’s not tangible.
Antonia Felix, Partner
Mishcon de Reya
Exactly.
Ben Glassman, Partner
Evelyn Partners
The irony is, is that if you’re living in a property, you can’t spend it, you know, there’s no income for that individual and they’re often really misvalued, so having a pension on divorce expert within those early stages of divorce can identify what the value is, the true value here and what one’s giving up.
Antonia Felix, Partner
Mishcon de Reya
Exactly but even with the state pension, for example, women often haven’t made enough National Insurance contributions if they’ve worked part-time and even, you know, part of the process is to find out what top-up might be needed, which then feeds into the calculations and often they don’t even know that’s the situation.
Ben Glassman, Partner
Evelyn Partners
Yeah, really good point. It’s a really good return to make those top-ups because you’ve got, you know, triple lock on pensions and it looks like everyone’s going to be getting an inflation increase this year so, making a small contribution to have that guaranteed secured income increasing with inflation, is hugely valuable. And the other point that I’d make is that when you’re looking at matrimonial assets, the offsetting of a pension that might have a value, a nominal value of a million pounds, versus a property with a nominal value of a million pounds, they are not the same thing. You can’t spend your property in any case but the valuation on a pension may be significantly undervalued just because of how it’s reported. So a Civil Service pension may be, you know, valued at a million pounds but to purchase the same level of income on the open market, you might need three million pounds worth of assets. So, having someone in the room, working on your side of the table, to give some counsel as to what the real value here can be hugely beneficial.
Antonia Felix, Partner
Mishcon de Reya
Yeah, and I think that’s exactly what we try to do with the client early on, just so they can understand everything.
Chris Springett, Partner
Evelyn Partners
Antonia, it’s interesting, I think a lot of these conversations are perhaps ones you’d expect a family lawyer to be having with their clients. Do you think your roles have been changing over the years?
Antonia Felix, Partner
Mishcon de Reya
I do. I mean, yeah, ten years ago I think people associated a family lawyer with just divorce and I think we’ve moved on from that in that of course, people are always going to get divorced or separated and that’s where a family lawyer comes in but I think it’s also now from a protection point of view, looking at rather than always being after the event or distressed purchase, we come in more in the planning stage, to work with a family and that comes into being the lifecycle of a family, not just when they’re adults but if they have children or helping them build their family, then during the course of their life, they will require advice at different stages and I think that’s where a family lawyer can come in but yes, I think it’s less just divorce and more about protecting and helping them plan and also supporting them in kind of key moments in their life.
Ben Glassman, Partner
Evelyn Partners
And so, what about the emotional support that you guys give during that process? Is there more of that now or is that something that’s looking to be outsourced to other parties?
Antonia Felix, Partner
Mishcon de Reya
So, we definitely outsource to therapists and I think that’s really important at the outset for clients to be given the advice, if they’re not already seeing a therapist or a counsellor, to seek that help because they don’t want to pay for us for unqualified, therapeutic advice but obviously, you do learn over the years, in this role, how people react in certain situations so, we definitely support them but mainly the emotional support would be from a therapist, as part of the process, or from their family members and friends, rather than us but definitely, you know, that, that’s the relationship, like you, that you build with your client and you get to know them and hopefully that helps you support them along their journey.
Chris Springett, Partner
Evelyn Partners
That’s interesting on support, Antonia. Naturally, that flows to longer term planning and estate planning, inheritance tax. Anything worth thinking through the pension there?
Ben Glassman, Partner
Evelyn Partners
Yeah, I mean, I think this point that I was making earlier, define contribution pensions currently under legislation, are outside of the estate for inheritance tax purposes and it throws up all these really interesting opportunities, which can only happen on divorce. So, someone that has a pension end payment, an annuity or a final salary scheme, if they credit their spouse with their pensions, those assets move outside of the estate, that increases the opportunity for that partner to spend money but for assets to be passed onto their beneficiaries of the joint estate and so, this isn’t going to happen in all circumstances but couples that come together to try and think about how they can mitigate tax for the benefit of their children or beneficiaries of their estate, can come up with some really interesting and significant savings from inheritance tax perspective. We’ve looked at lots of cases where those figures, you know, they’re not incidental, you may be taking several millions of pounds just be thinking strategically about what each party may need during their lifetimes and what is surplus to requirements.
Antonia Felix, Partner
Mishcon de Reya
And we often do have those discussions with clients if they’ve got children or later in life, you know, they’ve worked hard to save, they do want to try to pass it on in the most tax efficient way and to be creative with it, particularly if they’re not going through the court and they’re reaching agreement themselves, then essentially you can be as creative as you want to be.
Ben Glassman, Partner
Evelyn Partners
And I think this is right, if there are individuals that are looking, you know, to separate on the best terms for the benefit of their, you know, whether they’re trying to co-parent in an effective manner or just, you know, they’re more elderly, the silver separators, that actually you know it’s time that they sort of, because they’ve grown apart, that they can make plans during their divorce process that may have significant impact for the benefit of their joint estates and that can be really powerful.
Annie Bouch, Associate
Mishcon de Reya
I think that’s especially key where they have children from that marriage because it may well be that one party or both parties go on and remarry and have more children and they want that their assets created from the joint estate to be preserved for their joint children and so there’s definitely a bigger piece there with wills, estate planning, combined with the pension, it’s important to work together there.
Ben Glassman, Partner
Evelyn Partners
Absolutely and you can see why the creation of trust, the completion of a will at that point, is so, so vital, without a doubt.
Antonia Felix, Partner
Mishcon de Reya
And working together with advisors and knowing that both sides have that advice because, as I say, the Court can’t make, within the context of family proceedings, they can’t make one party leave money to someone else because obviously people change their minds and that’s down to them but encouraging them to think about future generations or beyond the divorce is obviously something that’s really helpful for lots of reasons, as you say, to keep the relationship going if they’ve got children and they’re co-parenting or just to leave on good terms.
Ben Glassman, Partner
Evelyn Partners
I mean I guess the Courts aren’t interested if there are opportunities to save lots of tax or mitigate funds for the beneficiaries of the estate, the Court doesn’t really care about that in any way, so it’s only down to the individuals and the advisors that they’re getting together that these opportunities can be executed.
Antonia Felix, Partner
Mishcon de Reya
Exactly. If you reach an agreement that happens to be tax efficient, the Court, it will be approved if it’s fair and reasonable and, you know, meets all the criteria but no, the judge isn’t going to be thinking about that. You work from net figures, so you have all the calculations there and those are the figures they work from.
Ben Glassman, Partner
Evelyn Partners
Yeah.
Annie Bouch, Associate
Mishcon de Reya
We often find that separating couples are concerned how their lifestyle might be impacted by the divorce and whether they will have enough to live off. How can a financial planner help there?
Ben Glassman, Partner
Evelyn Partners
It’s a great question. I think it’s first and foremost, what a financial planner can do because they can understand where you are today, where you may be post-settlement and give an indication of what the financial trajectory for that individual will look like. I’m sure you may have heard of cashflow modelling or cashflow which can produce these future trajectories to say whether an individual is going to run out of money, whether there’s going to be a big estate left over, whether they’re spending too much or whatever it might be a requirement to go back to work. What it does, it provides clarity over an individual’s financial future and it may also reduce resentment of the other. If someone is walking away knowing that they’ve got the resources they need to meet their spending, they’re going to feel a lot more likely to agree to a particular settlement. Now, invariably, that isn’t always what happens but what it can then do if there isn’t sufficient resources, it can show what compromises need to be made or to assist in negotiations and that’s where it can be really valuable when working with professional parties with an individual’s lawyers to be able to say look, this settlement is not sufficient to meet my client’s long-term spending needs but actually, this number might be more suitable. I’m not saying that the other party’s going to agree but it does give some context to actually what a settlement could look like and how best you might want to put it together.
Annie Bouch, Associate
Mishcon de Reya
And I’m sure will make the other side consider the proposal more seriously if actually you had proper advice and can show the figures to support the required amounts.
Antonia Felix, Partner
Mishcon de Reya
Exactly, I always say to clients, knowledge is power, so that if you know what you need, it’s less likely, well you will be challenged for sure but at least you can come back and say no, I’ve been through it, I know what I need and it’s also a bit, you know it’s such an important life event and to actually look at what you spend, most of us spend our life not wanting to know what we’re spending and how much and then suddenly it’s in front of them but in a way, it helps them move forward on an informed basis.
Chris Springett, Partner
Evelyn Partners
It’s a great starting point for that longer term piece as well, isn’t it, that estate planning, understanding what requirements are today, allows you to then plan for the future.
Ben Glassman, Partner
Evelyn Partners
Yeah, it’s great empowerment, particularly if there’s asymmetries in financial knowledge, one party, invariably the husband, has taken control of the financial affairs and a settlement is being awarded, you know, misogynistically to the spouse who has less, less knowledge and less experience, it can be quite overwhelming and to be able to take control and see what one’s future looks like, you’re able to turn over a new page and take control of your future and a lot of the role of a planner is to empower, provide that context and think about how things do get structured, the type of income, the type of lifestyle that individual may have post-settlement.
Annie Bouch, Associate
Mishcon de Reya
And will you continue to work with that individual on a sort of a yearly basis or is it a one-off engagement? How does it work?
Ben Glassman, Partner
Evelyn Partners
Yeah, I mean, I think it’s, you know, we’d love to work with clients for, like yourselves, to work with them for ten years, twenty years, whatever it might be, building long-term relationships, where a plan is just the starting point but it needs to be reviewed and updated each year, depending on circumstances because as we know, things change very easily and having a plan that’s flexible enough to adapt to that, is really valuable.
Chris Springett, Partner
Evelyn Partners
There’s a question I was going to ask, you know, when you’re going to the divorce proceedings, the temptation is to think of every spending, you know, every spend that someone might have and I’ve seen, you know, the budget planners and Form E’s where, you know, the spending is, they call it Deluxbury requests and it’s kind of like the spending levels are just so large…
Antonia Felix, Partner
Mishcon de Reya
Yes, like a wish list rather than, yeah.
Chris Springett, Partner
Evelyn Partners
And then what’s a challenge for me is then when I meet a client and they’ve had that spend in mind and I say look, it’s just not going to be realistic you’re going to be able to spend at that level and then there’s this, this new budget planning you have to do. You’ve got to say well actually, what do you need and what don’t you need? And I just want to get your thoughts in terms of, presumably you’re trying to increase the value of the spend but in reality, is that not really what an individual is looking to spend?
Antonia Felix, Partner
Mishcon de Reya
No, so we really want it to be realistic because you’ve always got to have one eye on the fact you might be in Court. Hopefully you won’t be but that’s when you will be asked questions about your budget, so it has to be either based on your spending during the marriage or a future budget or a sort of slight mesh of the two and it can be quite tricky, as you say, because if you give a client a budget to look at and it has all the things that you think they might be spending, you have some clients say they need to spend £7,000 a year on flowers when they’ve never actually had flowers so, it almost encourages them to think oh yeah, I wouldn’t mind doing that. So, it is a real balance of being realistic and trying to think about what might happen like, so if you’re going to size down and have a smaller house then your utility bills will be lower but also you have to show that you did have higher ones, so potentially it’s affordable in the future, for the budget to be slightly higher. So, there is no magic to it, which is why it’s obviously really helpful to have the input of the tools that you can have and then the family lawyers have to work through it with the client and it can take hours and hours to do.
Ben Glassman, Partner
Evelyn Partners
That’s it. It’s not necessarily a wish list but it’s kind of like, I would like, I would like to be having, you know, buying flowers every week or whatever it might be and I’d like to have the garden done or whatever it is, these are all the things that you would like to do, whether or not it happened or not.
Antonia Felix, Partner
Mishcon de Reya
Yeah, but the judge, when looking at it, will have a feel for what a family of four, five, six will be spending in certain areas and you know, those are the first type of things, the luxury items, that go if you need to reduce the budget. So, sometimes it’s better not to start too high because it just looks so unrealistic, which is why I always say try to start from what you’re actually spending and really, if you can go through the last twelve months of your bank statements, which is obviously a fairly dull task for most clients to do but then you really do get a sense of what you’ve been spending.
Ben Glassman, Partner
Evelyn Partners
From my perspective, that being as accurate as possible is the most important, that underpins the plan really, like trying to work out what actually does lifestyle look like and then understanding other resources there, is there a way of structuring the resources to meet that spend? Historically, what I’ve found is that those numbers tend to be overestimated and the, particularly the capitalised settlement, as a result of a calculation maybe through Duxbury, is not sufficient to meet that spend.
Antonia Felix, Partner
Mishcon de Reya
No, and that’s why I think you do have to be, as a family lawyer, realistic with your client and that’s why it helps them to understand the figures and the calculations because otherwise if they get less than the expect, they walk away worrying about how they’re going to pay for things in the future, whereas if they’ve had that support the whole way through then they understand more how they’re going to live. And it’s also quite a good time because people say oh, I’d like to put money into my pension for example but they haven’t been previously, so you can kind of work with them on the budget to see what they might be able to cut in order to then make those contributions in the future.
Ben Glassman, Partner
Evelyn Partners
Really good.
Antonia Felix, Partner
Mishcon de Reya
Well that seems like a good time to wrap up. I’d like to say thanks so much to Ben and Chris for joining myself and Annie for this Mishcon Academy Digital Sessions podcast so, thank you both.
Ben Glassman, Partner
Evelyn Partners
Yeah, thanks Antonia.
Chris Springett, Partner
Evelyn Partners
Yeah, it’s been really interesting, thank you.
Antonia Felix, Partner
Mishcon de Reya
I’m Antonia Felix and the Digital Sessions are a series of online events, videos and podcasts, all available at Mishcon.com and if you have any questions you would like answered or suggestions of what you’d like us to cover, do let us know at digitalsessions@mishcon.com.
The Mishcon Academy Digital Sessions. To access advice for businesses that is regularly updated, please visit Mishcon.com.