Capital Gains Tax 

Know your tax facts on divorce and separation

  • To learn about the division of assets on divorce
  • To understand the importance of tax issues
  • To remind oneself of the allowances
CPD
30min
Know your tax facts on divorce and separation

The summer break can be a testing time of juggling work and family commitments, and lawyers have seen an increase in divorce applications peak after the summer stress. The tax impact of separation and divorce can often be overlooked, but considering the division of assets early and taking appropriate tax advice will be key to avoiding large sums being unnecessarily paid to the tax man.  

For those in the know, separation on or shortly after 6 April will provide couples the most time to organise their joint affairs. The income tax and inheritance tax (IHT) implications of divorce should be considered, but are usually limited. However, the capital gains tax (CGT) implications following permanent separation can offer opportunities for planning or unexpected liabilities, particularly if it takes time to agree on the separation of assets.

General CGT principles

When a couple are married or in a civil partnership, assets can be transferred between them on a nil gain, nil loss basis, meaning that no taxable gains arises on the transfer. This spouse exemption ends at the end of the tax year following separation. This is an important distinction as the CGT spousal transfer rules might not apply in the tax year of divorce if separation happened in an earlier tax year. Identifying the date of separation is the first stage in identifying the tax implications on divorce.

If assets are transferred after the tax year of separation, the couple are still connected persons, the transfer will be deemed to take place at market value and a CGT disposal will also take place. Each person has an annual exemption (£11,300 for 2017/18) and after this amount the gain will be taxed at 10 per cent for basic rate taxpayers or 20 per cent for higher rate taxpayers. If the asset disposed of is residential property, then the applicable tax rates are 18 per cent and 28 per cent respectively. 

Key points

  • Considering the division of assets early in divorce and taking appropriate tax advice will be key.
  • Tax implications are likely to change the longer a couple is separated without final agreements.
  • Taking appropriate legal advice as well as tax advice on separation can make a significant difference to the overall tax position.

Former spouses cease to be connected persons once decree absolute has been issued. Transfers after decree absolute will be for actual consideration, if any, rather than market value. The date of disposal needs to be reviewed as this can vary depending on the timing of the court order and the decree absolute.

Principal Private Residence Relief (PPR)

The family home is often the family asset of highest value, and in most cases individuals would not consider that the transfer of the home could be a chargeable disposal. However, the family home ceases to be the main residence of the spouse or partner who leaves it following separation.

The final 18 months will still qualify as a period of deemed occupation for PPR, allowing one spouse to dispose of their share of the property to the remaining spouse within 18 months of moving out, exempt of capital gains tax.

There are provisions that allow PPR to be claimed on a transfer to the spouse more than 18 months after they move out. These provisions allow the former matrimonial home to be treated as the only or main residence of the departing spouse from the date their occupation ceased until the earlier of:

  • The date of transfer, or  
  • The date on which the property ceases to be the only or main residence of the remaining spouse to whom the property is transferred.

If the departing spouse has acquired another place to live since leaving the family home, it might not be advantageous to make a claim for this provision to apply. PPR relief can only be allowed on one residence at a time. If relief is given on the former matrimonial home, it will be lost on the other property. 

Comments

CPD
30min
  1. A couple can transfer assets between them on a nil rate basis, true or false?

  2. What is the annual CGT exemption for each person?

  3. If the home is sold within 18 months of one spouse leaving the property, the gain on the sale will be exempt for both parties, true or false?

  4. When will holdover relief be available?

  5. When can income tax relief on EIS Investments be clawed back?

  6. What is the spouse exemption limited to if the transfer is made from a UK-deemed domiciled individual to a non-UK domiciled spouse?

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