Jan Ellis, chartered accountant, of Ellis Foster LLP, a firm which specialises in advising family lawyers on tax-related family law issues, explains the budget changes of most relevance to family lawyers.
The 2014 budget had a focus on “if you’re a maker, a doer or a saver, this Budget is for you”. Again, much of the content had been pre-announced, either in the Autumn Statement or in draft legislation published beforehand, although a dramatic change to money-purchase personal pension schemes was included at the end.
There is no change in the main basic and higher rates of income tax. As announced last year, personal allowances go up to £10,000 in 2014/15 and the basic rate band is £31,865 for 2014/15. The top-rate of income tax remains at 45% (but is likely to increase again to 50% if there is a change of government in May 2015). Personal allowances are lost when income reaches £100,000. The complicated rules for the 10% savings rate are abolished.
Finance Bill 2014 will allow basic-rate married couples (only, including civil partners) to transfer up to £1,050 of their personal allowances to each other, with effect from April 2105.
Capital gains tax
There are no changes in the rates of CGT: these are 10% with entrepreneurs’ relief (up to a lifetime total of £10m-worth of gains); 18% for gains made by a basic-rate taxpayer; and 28% for a higher or top-rate taxpayer, or who is brought into higher rates when taxable income and gains are aggregated. The CGT annual exemption goes up from £10,900 to £11,000 for 2013/14.
Remember that assets transferred between husband and wife or civil partners are on a no gain/ no loss basis while married and in the tax year of separation, and are deemed to be at market value after this.
Note a change in the CGT rules with effect from 6 April 2014 relating to the CGT position of properties which have been a main residence but are no longer occupied as such. This is particularly relevant to divorced or separated couples who own a home jointly and one party has moved out – including properties dealt with under Martin orders or Mesher orders.
The general rule is that a “main residence” is exempt from CGT on sale. Married couples are allowed one tax-free main residence between them. If a person changes their main residence, historically the last three years of ownership of property 1 continues to be tax-free, after the purchase of property 2, even if property 1 is not then occupied as the person’s main residence. This was to allow time in a slow housing market for the property to be sold (although perhaps abused by a number of MPs).
Under s225B TCGA (formerly ESC D6), a divorcing spouse (or civil partner but not unmarried separating couples) could continue to claim main residence relief on a property he owned or owned jointly with the other spouse, who continued to occupy it after he moved out, provided the spouse who leaves the property does not elect for a second property to be his tax-free residence.
This meant that if a property was likely to be sold within 3 years – for example by reason of the children’s ages – and the non-occupying spouse has bought a new home, and in particular if the property market was rising, it would make sense for the non-occupying spouse not to elect under s225B but to rely on the “last 3 years’ relief”.
With effect from 6 April 2014, the “last 3 years'” rule is to halve, so that tax is potentially due if the property is not occupied by its owner for more than 18 months before being sold.
This potentially changes the maths, and so clients not occupying the FMH should assess their position.
Full article courtesy of Family Law Week