Capital Gains Tax and Divorce

The transfer of assets between married couples does not attract capital gains tax (although it could give rise to stap duty). However, when a couple separates and divorce this position may change.

In March 2023, the government introduced legislation (the Finance (no 2 Bill) 2023) to improve the CGT position for divorcing couples. This legislation, which was effective from 6 April 2023 and received Royal Assent on 11 July 2023, means that couples now have a longer period in which to agree their financial settlement and transfer assets between each other, without facing unwanted CGT consequences. In addition, amendments were made to improve the CGT position where couples agree, or the court orders, that the sale of the family home should be deferred to a later date.

Our team of divorce lawyers in Milton Keynes and divorce lawyer in bicester  are here to provide expert advice tailored to your circumstances. In the meantime, the following article provides a helpful overview of Capital Gains Tax in relation to divorce.

Capital Gains Tax (CGT) is a tax on the profit when you sell or dispose of an asset that has increased in value. The definition of disposing includes selling, gifting, transferring, swapping it for something else or getting compensation for it. It is the gain you make that is taxed, not the amount of money you receive. Some assets are tax free and you do not have to pay CGT if all your gains in a year are under the tax free allowance (called the Annual Exemption Amount) which is currently £6,000 for individuals.

Individuals who are married can transfer assets between themselves, without any CGT arising. The transfer will be treated as taking place on a no gain no loss basis. The transferee is deemed to have purchased the asset for the same price their spouse paid for it, so no CGT arises.

When married couples separate, they can transfer assets between them without being subject to CGT for an unlimited time if the assets are the subject of a formal Consent Order. Without an order, there is a time limit of the earlier of:

• The date on which a court grants a divorce (or dissolution or annulment of marriage/ civil partnership, judicial separation or separation in accordance with a separation order) or
• Three years after the tax year in which they separate.

The sale or transfer of a family home often attracts a special CGT relief known as principal private residence relief (PPR relief), which enables individuals to transfer or sell their main home without paying CGT on any gain made. PPR relief is only available where the property in question is an individual’s main residence and is occupied by them, except in certain limited conditions.

Where either spouse has more than one residence, they can separately nominate which property should be considered their main residence for the purposes of PPR relief.

Where one spouse moves out of the matrimonial home and they transfer their interest in that home to the other spouse under a court order or other agreement made in contemplation of a permanent separation a special extension to PPR may apply. For the extension to apply, the transferee must have continued to occupy the property as their residence throughout the period since the transferor left the property. There is no maximum time that can be covered by this relief. However, the transferor will not be able to claim PPR on any other property during the extended relief period.  This additional relief will not apply if the property is being sold to a third party.

If the transferring spouse has left the matrimonial home for a period that exceeds nine months they may not fully qualify for PPR relief.

Tax implications of separation and divorce lawyer can be complex and costly if you do not seek professional advice. Separating and divorcing couples should therefore think carefully about and plan the split of their assets and take legal and tax advice to minimise the tax cost of their separation.

Ready to take the next step? As leading divorce solicitors in Milton Keynes, our team of family law specialists can advise you about your divorce settlement. As well as our head office in Milton Keynes, we also have offices in Bicester, Watford, and London where we can arrange appointments to see you in person. Talk to us in confidence and find out where you stand. Get in touch – we’re here to help.

This article is intended for the use of our clients and other interested parties. The information contained in it reflects the author’s view and is believed to be correct at the date of publication. However, it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional legal advice.