Capital gains tax on divorce
Working out where you stand in terms of Capital Gains Tax (CGT) when going through a divorce can be bewildering and understandably, the last thing on the mind when a marriage has broken down.
Nonetheless, you need to be informed and know where you stand.
Currently, you do not have to pay Capital Gains Tax if you transfer a property to your husband, wife or civil partner – this is under the no gain/no loss rule on transfer of assets between spouses.
However, you may be liable to pay Capital Gains Tax on property you transfer to your ex-partner should the marriage end. When a couple separate, the period of CGT relief between spouses is extended, but only until the end of the tax year of separation.
If you transfer a property in the tax years following separation you may be liable for Capital Gains Tax.
If you have transferred a property in the tax year that you have lived in together at any point, there will be no CGT due.
However, if the property is transferred during a tax year that you have not lived together you may be liable to CGT.
What counts as ‘living together’
You and your spouse or civil partner are treated as living together unless you are separated:
- under a court order
- by a formal Deed of Separation executed under seal (in Scotland a deed should be witnessed)
- in such circumstances that the separation is likely to be permanent
In each case the marriage or civil partnership must have broken down. If the marriage or civil partnership has not broken down but the two of you do not live in the same house, you are still treated as living together for Capital Gains Tax purposes.
The most frequently asked question we get is, no money is being exchanged for the property, why will there be Capital Gains Tax due?
HMRC still view the transfer of the property as a disposal and therefore liable to CGT, even though no actual money changes hands.
You will need to obtain a valuation of the property at the date of transfer to calculate if there is a gain. HMRC require you to calculate the gain using the market value at the time of transfer. There are reliefs to be claimed against CGT if you have lived in the property at any time. You can claim relief for the period that you have lived in the property and the final 9 months of ownership.
In divorce cases, the family home is often the largest asset. However, if you transfer the property within 9 months of officially moving out, there will be no CGT due as you will be covered by the Private Residence Relief. If you transfer the family home after 9 months of moving out and the transfer falls into the tax year following separation, there may be CGT to pay.
Joe and his spouse separated on 1st December 2021. Under the CGT rules between spouses, Joe is required to transfer any property before the tax year finishes on 5th April 2022 in order to avoid paying CGT. If Joe moved out of his family home on 1st December 2021 and the transfer of the property was not completed until 1st June 2022, the sale would fall into the following tax year and CGT may be due. However, as the property being transferred is Joe’s family home and has always been his main residence, the potential CGT due is covered by Private Residence Relief as the transfer is made within 9 months of Joe moving out of the property, therefore no CGT will be due.
If Joe was transferring a further property that was not his main residence and he had never lived in the property, he would not qualify for Private Residence Relief and the transfer will need to be completed during the tax year of separation, in this case before 5th April 2022 to avoid any CGT.
If Joe was transferring a further property that he bought 10 years ago and was not his family home, but he lived in the property for 1 year when he first bought it, Joe would be able to claim the Private Residence Relief for the period he lived in the property and the final 9 months of ownership. However, Joe may be subject to CGT on the gain arising for the period that Joe has not lived in the property. Therefore, Joe will need to transfer the property during the tax year of separation to avoid paying CGT. If Joe transfers the property after the tax year of separation, he may be liable for CGT.
For further information on general CGT queries, please see our Capital Gains Tax page.
© Thandi Nicholls Ltd 2022 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, K Nicholls FCA or S Thandi cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
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