Autumn budget - Capital Gains Tax increase and divorce settlements

The Budget increases the lower rate of Capital Gains Tax (CGT) from 10% to 18% and the higher rate from 20% to 24%. 

Will this affect family financial settlements?

In family matters, when negotiating a settlement or when the court makes an order, the financial position is taken as being net of CGT. Liabilities include tax incurred but not yet paid. Also included is estimated CGT which would be payable if any assets were sold now (inherent CGT).  The inherent CGT is included in a schedule of assets, even if the asset in question is not imminently to be sold.  Often an accountant is jointly instructed to advise as to the likely CGT on the assumption of given figures as to values, acquisition costs, deductible improvements, and costs of sale.  Normally if a party takes on or retains an asset with inherent CGT, the tax is notionally deducted so that the attributable value to that party is the net value. Accordingly, if the  CGT is underestimated, that party will not receive the net assets intended. If a 50/50 settlement was intended, this may not be achieved. 

With the change in the CGT rates there are various possible scenarios:

1. An order has been made several years ago and implemented, but one party retains  assets which are subject to CGT and the amount of tax payable is now more than estimated as a result of the change in the CGT rules. 
   
   There is a principle of finality in litigation, so that parties are able to move on with their lives after a financial order. A change in tax treatment is not the fault of either party and the order would have been made on the facts which were considered to be right at the time. It is possible to apply to set aside an order on the basis that new events have invalidated the basis or fundamental assumption on which an order was made. If the order was made several years ago, this is too late (the order should be less than a year ago to have a chance of success).
    
2. As above, but the order was made in the last few months.
   
   In order to set aside a financial order, the new events have to be unforeseen and unforeseeable. Neither a new Government nor an increase in CGT could be said to be unforeseeable. In any event,  the new treatment of CGT would have to be so significant that a different order would have been made, which seems unlikely.  If the asset does not need to be sold imminently, the amount of inherent CGT is to some extent, academic and will be subject to change in any event as a result of changing values. 
    
3. There is a negotiated agreement on the basis of CGT estimates which now are wrong.
   
   If there is an open agreement, but an order has not been made, then normally the parties would be held to it provided that there are no other reasons to get out of it (such as no advice, duress, lack of disclosure). However, if an order has not been made in practice a party may be in a better position to get out of an agreement depending on the circumstances.  If the intention is to have a 50/50 split, and one party holds all the assets with inherent CGT, or if the figures are very tight so that one party is unable to rehouse as a result of the change in rates, there may be an attempt at renegotiation. 
    
4. Negotiations are ongoing
   
   The figures should be recalculated based on the actual CGT rates.
   
   In most cases, inherent CGT only plays a relatively small part in any asset schedule and so it is unlikely that a change in rates will have a fundamental effect on any settlement.