Capital gains tax is payable when you sell an asset for more than its purchase price. The transfer of assets between spouses and civil partners is exempt from capital gains tax as the transfer is considered to be on a “no gain, no loss” basis. This simple case becomes much more complicated when the transfer of assets is a result of the separation of the couple or as part of the court order during the financial dispute resolution.
Who should read this?
“Capital Gains Tax on Separation” or “Capital Gains Tax on Divorce” or “Capital Gains Tax Advisor in Wimbledon, London” might be the search that brought you to this page. If you are going through a divorce or you are an accountant or solicitor in practice who needs to understand how the capital gains tax works on separation and divorce. In that case, you will find this article helpful in understanding the basics, some technicalities and information about reporting the gain.
Before covering the capital gains tax liability on separation, we need to understand what counts as separation. The couple can be treated as separated from each other if ;
- Separation is under a court order, or
- A separation agreement is in place, or
- The separation is under circumstances where it is likely that the separation will be permanent.
In each case, the marriage or civil partnership must have broken down. In case 3, if you live in the same house as two individuals, the separation is likely to be permanent. You will be treated as separated from your spouse or civil partner. It is vital to note that this is a point of law rather than a point of tax, and you must seek professional legal advice if in doubt.
Transfers in the Tax Year of Separation
Now that you have understood the concept of separation, we will move on to the capital gains tax issues on separation. Property can be anything, for example, a family home, second homes, shares, jewellery, antiques and the list can be exhaustive. However, this article assumes that the couple separating and divorcing have only one family home in their joint names, which we refer to as property.
Suppose, on separation; one spouse transfers their share of the property to the other during the tax year of separation, i.e. between 6 April and 5 April of the following year. In that case, the transfer will be on a no gain, no loss basis. If the transfer takes place after the tax year of separation, the transfer will be deemed to have taken place at the market value. The market value is used because they are still connected even though the couple is separated.
Example of Transfer of Property on Separation
- Mr Jam transferred his share in the family home to Ms Butter on 30 June 2020.
- Mr Jam and Ms Butter separated on 1 December 2020. Mr Jam transferred another asset to Ms Butter on 1 March 2021.
- The above transfers take place for an amount which gives neither a gain nor a loss to Mr Jam.
- Transfers may take place on no gain, no loss basis up to and including 5 April 2021, even though the couple stopped living together after 1 December 2020.
Suppose a transfer takes place between you and your spouse or civil partner after the end of the tax year in which you are separated. In that case, there are rules to decide the date of disposal and the amount of consideration on disposal. These rules depend on your particular circumstances, and the information you’ll need is the date of:
- Any decree absolute or dissolution of the civil partnership
- The court order if the asset was transferred by such an order
- Any other contract under which the asset was transferred
These rules are complicated, and you must speak to your tax adviser to seek further assistance.
Principal Private Residence Relief
The family home stops being the main residence for the spouse or civil partner moving out; therefore, the availability of the PPR relief can be at risk. And if this happens, the spouse or civil partner moving out may have to pay capital gains tax on the transfer.
If the transfer takes place within nine months of one spouse moving out, there will be no capital gains tax as the last nine months exemption will apply automatically.
However, if the transfer takes place after more than nine months of one spouse moving out, full PPR relief will only be available if;
- The home continues to be the other spouse’s main home
- The transfer is a result of the court order or consent order
- The leaving spouse has not elected a new main home or principal private residence.
A divorce can be the most stressful time and having to leave your family home, selling or transferring it can be emotionally draining. On top of that, the harsh reality is that the whole process comes with complex capital gains tax implications.
During such stressful times, it is easier to forget the small details that can prove costly in the future. My advice is that if you are in any doubt, always seek professional tax advice from a tax adviser. Most tax advisers offer a free 20 to 30-minute consultation, which you can use to establish how much help you will need and what a professional help can bring to you.
Zia Tahir, the author of this article, has years of experience and in-depth knowledge of complex income tax and capital gains tax. To book a free and non-obligatory with Zia Tahir, please call us on 020 7859 4047 or fill in the contact form below.