Capital Gains Tax In Divorce
Capital Gains Tax in Divorce can be a further challenge in an already difficult time for all concerned. The Capital Gains Tax regime (CGT) (the tax payable on the profit from asset sales) has recently been changed to alleviate some of the financial concerns that can add extra stress to families during divorce.
Meaning of separation
For CGT purposes, you are able to transfer assets between you and your spouse or civil partner without incurring an immediate CGT liability provided you are not separated from them. The transfer is said to occur at ‘no gain no loss’. In a ‘no gain no loss’ transaction, your ‘proceeds’ are deemed to be such that there is neither a gain nor a loss. This is regardless of the amount actually paid or received in return (if anything).
You are separated from your spouse or civil partner for CGT purposes if you are separated:
- under a court order, or
- by a formal deed of separation, or
- in such circumstances that the separation is likely to be permanent
If you separated from your spouse or civil partner in circumstances likely to be permanent before the date of the relevant court order or formal deed of separation (as will generally be the case), then the date of separation for CGT purposes will be the earlier date.
If you are not married or in a civil partnership with your partner, then you cannot transfer assets between you on a ‘no gain no loss’ basis.
Transfers of assets after separation up to 5 April 2023
It was previously the case that you could only get ‘no gain no loss’ treatment up to the end of the tax year in which you separate from your spouse or civil partner. For example, if you separated in November 2022, assets transferred between you up to 5 April 2023 would not trigger a CGT charge. For those separating later in the tax year this did not give much time to arrange financial affairs.
Transfers of assets after separation on or after 6 April 2023
The big change is that for transfers of assets taking place on or after 6 April 2023, the rules are now much more helpful: separating married couples/civil partners continue to have ‘no gain no loss’ CGT treatment applied on transfers of assets to each other for up to three years from the end of the tax year of separation. However, if the couple divorces (or otherwise they become legally separated by court order) before the end of the three-year period, ‘no gain no loss’ treatment will end at the date the divorce is finalised, unless the transfer of assets takes place as part of a formal divorce (or court separation) agreement. Where assets are transferred as part of a formal divorce (or court separation) agreement, there is no time limit applied to ‘no gain no loss’ treatment of asset transfers.
These rules also include a change to how capital gains are calculated on the sale of the former marital home, where one party moves out following separation and there is an agreement for that person to receive a percentage of the proceeds from the sale. This allows that party to have any main residence relief on their share of the gain unaffected by the fact they did not live in the property between their moving out and the property being sold.
Example – transfer on separation
Peter and Charlotte are married but separated permanently in February 2024. They own a rental property jointly. They agree in October 2024 that Peter will transfer his half share in the rental property to Charlotte. The transfer will take place at ‘no gain no loss’ as it is within three years of the end of the tax year of separation (so they actually have until 5 April 2027 to make any asset transfers between them – assuming they do not divorce or enter into a court separation agreement before that date).
Note that Charlotte will receive the half share of the property at Peter’s original ‘base cost’ for CGT and therefore might suffer a higher charge to CGT if she decides to sell the property at a later date.
In general terms, if transfers of assets between spouses/civil partners do not qualify for ‘no gain no loss’ treatment, they will be treated as gifts and therefore liable to CGT. However, as shown below, main residence relief may be available if the asset being transferred is the family home.
Sale of the family home
It might be the case that on separation a jointly owned family home needs to be sold.
One spouse’s share of the proceeds will remain free of CGT provided the home has been that spouse’s main home throughout the entire period of ownership. However, if you have moved out of the property before sale then you may need to think about your CGT position.
Usually, if the property is sold within 9 months of moving out, then main residence relief should be available to cover the gain. If you move out more than 9 months before sale, a proportion of the gain may become liable to tax.
There is however a special relief available where, in connection with a permanent separation or divorce or dissolution of civil partnership, the family home is sold to an unconnected third party.
The relief is only relevant if the leaving spouse or civil partner makes the transfer more than 9 months after having left the property, because the leaving spouse or civil partner would be entitled to main residence relief for the final 9 months of ownership of their share in any case. All of the following conditions must apply:
- The property is transferred (sold) to someone other than the remaining spouse or civil partner.
- During the period after having moved out, but before the sale, no other property becomes a main residence of the spouse or civil partner who has moved out.
- During the period after having moved out, the property in question remained the main residence of the remaining spouse or civil partner.
If these conditions are met, the leaving spouse or civil partner will still obtain main residence relief from CGT for the period from his or her moving out to the point of transfer. Of course, if you have purchased another property to live in following moving out of the family home, then if that property is elected as your main residence, you may lose the ability to claim main residence relief under the special rules above.
If the property is not sold, but your share is instead transferred to the remaining spouse/civil partner, then the usual no gain no loss rules should apply, provided the transfer takes place in the relevant time frame.
If you have any questions around Capital Gains Tax in Divorce, please get in touch with our experts who will be happy to help.
