Preparing tax returns for clients has always provided scope for moments of embarrassment. The traditional one related to separation of husband and wife in circumstances likely to render that separation permanent. This is of vital importance for capital gains tax purposes, as inter-spouse transfers only remain no gain no loss for capital gains tax purposes until the end of the tax year in which permanent separation takes place.
Given that separation and subsequent divorce are the time when inter-spouse transfers are by far the most likely to happen (ask Paul McCartney) the capital gains tax consequences of the timing of transfers, and thus of separation, can be absolutely critical. This is particularly so because, although they cease to be eligible for no gain no loss treatment, separated spouses remain connected persons until divorce, and thus transfers between them after the end of the tax year of separation and before decree absolute are deemed to take place at market value for CGT purposes.
This can therefore require rather more questioning about detailed domestic arrangements than many taxation practitioners are comfortable with. Separation may be declared to be a state of mind as opposed to a state of physical proximity, but couples have a tendency to judge the matter in terms of the latter rather than the former. Particularly tricky are situations where asset transfers have taken place at inconvenient times, usually just after the end of the tax year of permanent separation. This often required tactful questioning as to whether any temporary reconciliation might have taken place shortly after 5th April; I suspect that we might (not) be surprised by the number of permanent separations that occur shortly after 5th April each year.
This was bad enough, but then came the civil partnership. I had never had particular problems with opposite sex couples forgetting to tell me they had married; it was pretty generally understood that being married mattered for tax purposes, and that telling your tax adviser was therefor probably a good idea. And there tended to be a fairly general assumption that if an opposite sex couple were living in the same house they were co-habiting. I am sure this had the potential to cause embarrassment in a small number of cases where that assumption was unwarranted, but the issue never arose with me.
Civil partnerships were a lot more difficult. There was a less general understanding of the tax consequences (precisely the same as marriage) which made it more likely that clients might not tell you about a civil partnership than about a marriage. So did you ask them if they remained silent? Property sharing by non co-habiting same sex couples was, and I suspect remains, much more common than by their opposite sex equivalents, so the opportunities for getting it wrong, with toe-curling possibilities of embarrassment, were much greater. “Are they a couple?” has been a question directed at me more than once concerning clients who share a property, to which my answer is usually “how on earth would I know?”, which I am aware is really helpful of me.
But now comes the classic. It was a bad enough idea to withdraw child benefit for those couples with joint income 0over £50,000 per year through the income tax system, but did the Treasury realise what they were letting tax advisers in for? The legislation refers to partners, which includes couples living together as man and wife or as civil partners as well as those who are formally married or in civil partnership. Not only that, but the detailed rules potentially require us to know the position in that respect for each week of the tax year.
So, not content with expecting us to ask those sharing properties, of whatever gender combination, whether they were living together as husband and wife or civil partners, we also have to ask them about any changes in those arrangements on a week to week basis; even they might not remember the answers in that much detail. Indeed, sometimes I have visions of our tax return questionnaires turning into something that might fit better between the covers of Fifty Shades of Grey.
So when we ask what appear to be really prurient questions, dear client, we are only so doing to ensure that you pay the correct amount of tax. Honestly…….