A guide to capital gains tax for divorced couples
Table Of Contents
When you dispose of an asset in the UK you have to pay what is known as capital gains tax on the gain or profit made. This is effectively a tax on unearned income.
Any transfer of assets between spouses is generally treated as though no loss or gain has been made, so no tax is payable, provided certain criteria are met.
While you are married you can transfer property to your spouse without any capital gains tax being paid, as long as you have lived together for at least part of the tax year in which the transfer occurred.
The benefit of this rule is not lost upon divorce but at the end of the tax year in which you separated.
Should you separate during the tax year, then any transfer of property made during that tax year is treated as though you had not separated. The tax year runs from 6th April to 5th April each year.
You are entitled to the benefit of private residence exemption for the period that you have occupied the family home as your only or main residence.
For this purpose, you are deemed to have occupied it for the last 3 years of ownership irrespective of where you have lived.
If you have only lived in the property part of the time then the relief is reduced proportionately. If the house is sold within 3 years of separation the sale is capital gains tax exempt.
If the house is sold more than 3 years after you left the home then your share of the capital gain may be taxable.
The spouse that continues to occupy the home after separation continues to qualify for the exemption. Where the house is transferred between spouses then the party that moved out is regarded as having continued to occupy the home, so there is no capital gains tax on the transfer, as long as:
- It took place within 3 years of separation; or
- It is transferred to the spouse who remained in the property; or
- It is transferred under a financial settlement to the civil partner/spouse who moved out and they have not elected to treat another property as their only or main residence. Where none of the above exemptions applies then capital gains tax will be payable, but the amount of tax will be reduced proportionately to the amount of time the property was the main residence. Even if the transfer is not chargeable for capital gain, when the property eventually comes to be sold capital gains tax will be payable.
The gain on disposal of other matrimonial assets may be reduced or eliminated by other exemptions or reliefs including annual exemptions and taper relief.
Advice from an accountant or financial adviser would be a sensible option. What is clear is that any delay in resolving financial issues may increase your tax liability when the assets are finally dealt with.
It is therefore important that you obtain prompt advice. HM revenue and Customs also provide a helpful fact sheet.
Another thing to watch out for is where one spouse has been left in the matrimonial home and the other spouse buys another property.
Technically the buyer of the 2nd property is liable for enhanced 2nd home stamp duty intended to curtail residential landlords.
You will need these arrangements to be set out in a financial order to avoid these pitfalls.