The Capital Gains Tax Consequences of Divorce
Divorce can be a tedious affair, but regardless of the circumstances, the capital gains tax consequences cannot be avoided.
With enough foresight, appropriate tax planning can be implemented to mitigate any potential tax liabilities as a result of divorce-related asset transfers.
The transfer of assets between spouses (or civil partners) who are living together are made at a ‘nil gain / nil loss’.
A transfer at nil gain / nil loss means that the person receiving the asset is treated as having paid an amount equal to the acquisition costs of the original purchaser for that asset – therefore neither a gain nor a loss arises to the person transferring it.
For the asset to be transferred at a nil gain / nil loss, the conditions for ‘living together’ must only be met at some point during the tax year – regardless of whether the parties involved were are at the date of the transfer.
Under current legislation, spouses are considered ‘living together’ unless separated by:
- court order;
- a formal Deed of Separation;
- in circumstances that the separation is likely to be permanent
If a divorce is finalised in the tax year of separation, the nil gain/nil loss rules will apply up until the end of that tax year.
The amount of deemed consideration at the nil gain / nil loss transfer will become the base cost of the asset for a future disposal by the transferee (any amount actually paid is ignored).
Spousal Transfer after the tax year of separation
Where the transfer of assets takes place after the tax year of separation (i.e. when they have stopped ‘living together’), the nil gain / nil loss rules cease to apply.
The date of disposal for capital gains tax purposes is treated as the date of a divorce agreement, or alternatively, the date of a court order. If the decree absolute occurs after a court order, the date of the decree absolute is the effective date.
Despite permanent separation, the husband and wife will remain ‘connected persons’ until the decree absolute has been issued.
Transactions between connected parties are considered to take place at ‘arms length’– that is to consider any transfer of assets between them as a disposal at market value.
Once the decree absolute has been issued, the spouses will no longer be ‘connected persons’ for CGT purposes (unless they remain connected for other reasons such as remaining business partners). Capital gains are calculated on the basis of actual consideration once spouses are no longer connected.
As discussed, if an asset is gifted/transferred as part of the settlement outside the year of separation, this is a disposal at market value by the transferor. Under certain conditions (not detailed in this article) a joint election for hold-over relief may be available– which defers the gain arising to the transferor by deducting it from the base cost carried forward for the transferee.
The Matrimonial Home
The matrimonial home, in most cases, represents the greatest proportion of a married couple’s overall wealth – which is why a divorce usually involves the sale of the home, and a distribution of the proceeds.
If one party to the divorce moves out of the home, but there is no intention to sell it by the other, a transfer of interest may take place as an alternative to selling it. The transfer of interest in a property is again a disposal for capital gains tax purposes, and a gain may become chargeable.
If the sale/transfer takes place after 18-months of no longer living together a capital gain will arise – in accordance with the rules for Principle Private Residence relief (PPR) discussed below.
Principle Private Residence relief (PPR)
If a gain arises on the sale/transfer of the matrimonial home, PPR relief may be available if the property has been your only/main residence for any period during ownership. This, broadly, allows relief for the proportion of time you occupied the home during total period of ownership plus any periods of ‘deemed’ occupation for qualifying periods of absence (such as the last 18-month of ownership).
For the purposes of PPR relief, neither spouse can have more than one residence / main residence during the time of living together.
The transferor can claim for the date of which the property ceased to be their main residence as the earlier of:
- the date of transfer, or
- the date on which the transferee ceases to use the property as their main residence
This is as opposed to the actual date the property ceased to be the main residence – thereby extending the relief available.
There are other factors to consider before claiming this relief, as PPR cannot be claimed for the same period but for another property. Some analysis may be necessary to determine where the relief should be claimed.
There are further considerations to be made where assets are realised post-divorce as a result of a court order.
In accordance with HMRC guidance, where the court has ordered that a specified allocation of proceeds from the sale of an asset are to be transferred from one party to another – the proceeds are not chargeable to CGT in the hands of the receiving party. Financial provisions ordered by the court are not within the scope of taxation.
Equally, the amount transferred to the other party does not amount to a cost to the transferring party for CGT purposes either.
For further details in relation to the issues discussed in this article, then please don’t hesitate to contact us and we can talk through the specifics of your circumstances.
Enterprise Tax Consultants can advise on all aspects of CGT.
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