Capital gains tax on divorce

Capital gains tax on divorce pre April 2023

Prior to April 2023 the position on Capital Gains Tax was as follows but read below for the changes after April 2023 which are significant.

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.

Example

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.

CGT Updates For 2023

Given the alterations presented in the 2023 Finance Act that impact divorcing individuals, the current moment appears favourable for revisiting the Capital Gains Tax (CGT) framework subsequent to a separation or divorce.

The pertinent tax laws governing the transfer of assets between a person cohabiting with their spouse or civil partner are located within section 58 of the Taxation of Chargeable Gains Act 1992.

Before the modifications introduced through the 2023 Finance Act, Section 58 stipulated that transfers of assets between spouses and civil partners living together were executed on a “no gain or no loss” principle during any tax year in which they resided together. This indicated that any gains or losses arising from the transfer were deferred until the receiving spouse or civil partner disposed of the assets. They were treated as having procured the assets at the original cost paid by the transferring spouse or civil partner.

In instances where spouses or civil partners separated, the no gain or no loss treatment was solely applicable to disposals in the remaining portion of the tax year when the separation occurred. Subsequent to this, transfers were treated as standard disposals for the purpose of capital gains tax.

Considering that divorces commonly take up to 8 months to finalize and often extend even longer, postponed decisions regarding asset division among divorcing parties could frequently involve undesirable CGT obligations. Effective from April 2023, amendments have been integrated into the legislation under Section 41 of the Finance (No. 2) Act 2023:

1. Divorcing spouses or civil partners now possess a window of up to three years from the year they cease cohabitation to execute no gain or no loss transfers.
2. The no gain or no loss treatment extends to assets that divorcing spouses or civil partners transfer between themselves as part of an official divorce agreement. This signifies that even in instances of prolonged divorces spanning multiple years, CGT concerns need not persist, as was the case previously.
3. A spouse or civil partner retaining a stake in their former matrimonial residence has the choice to claim Private Residence Relief (PRR) upon its sale.
4. Individuals who have conveyed their stake in the former matrimonial home to their ex-spouse or civil partner and are entitled to a portion of the proceeds upon its eventual sale can apply the same tax treatment to those proceeds as they did when transferring their initial interest in the home.

The modifications introduced starting April 2023 offer a sensible resolution to previously unhelpful legislation that affected couples during an already challenging period in their lives.

For further information on general CGT queries, please see our Capital Gains Tax page.

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