Capital Gains Tax in Marriage & Divorce
06 Apr 2021
Capital gains tax (CGT) has different implications for payments from one spouse to another during a marriage or following a separation. It is important to consider the tax implications of payments and transfers regarding the family home, in particular.
NB. Where we refer to a spouse within this article, we are also referring to a Civil Partner.
What is Capital Gains Tax?
Capital Gains Tax is potentially payable on the disposal of an asset, should that asset have increased in value since it was acquired.
Spousal exemption for CGT
If you are married, you can transfer assets from one spouse to another without any Capital Gains Tax becoming payable UNLESS you separate, then the transfer between one spouse to another is only free from any Capital Gains Tax liability up until the end of the tax year in which you “separated”.
How does HMRC determine the date of Separation?
For the purposes of Capital Gains Tax liability, you are deemed to have “separated” from one another if:
- It is expressed in a Court Order;
- It is expressed in a Separation Agreement; or
- In such circumstances that the separation is likely to be permanent.
Once the date of “separation” has been determined, transfers between married couples will be deemed to take place at market value, which could lead to a liability arising with regards to Capital Gain Tax. This will all depend on what date the disposal is deemed to have taken place on.
How does HMRC determine the date of Disposal?
Alongside your divorce, you will usually be negotiating and concluding a financial settlement too. Divorce proceedings conclude on receipt of Decree Absolute and financial matters conclude on receipt of a Judge approved sealed Consent Order.
A Consent Order will say “On Decree Absolute it is Ordered that…” and that the terms of such Order will not be enforceable under the Matrimonial Causes Act 1973 until such time as Decree Absolute has been made. However, as is often the case, transfers do take place prior to the obtaining of Decree Absolute.
If the transfers take place on receipt of Consent Order but prior to obtaining Decree Absolute, then the Court will deem that a Contract has been agreed between the parties to “act” prior to being divorced i.e., prior to obtaining Decree Absolute. In those cases, the date of “disposal” will be the date the Judge approved the Consent Order and not the future date on which the parties will obtain Decree Absolute.
If the parties choose to obtain a Consent Order and wait for Decree Absolute before they implement the transfers, the date of “disposal” will be the date the parties’ obtained their Decree Absolute.
However, if the parties choose to wait to obtain a Consent Order (and to implement it) until after they have got divorced (i.e., already in receipt of Decree Absolute) then the date of “disposal” will be the date the Judge approved the Consent Order.
If the parties choose to make transfers without having a Consent Order prepared, the date of disposal will be the date any contract is signed (i.e., completion day).
What about the family home?
Even without the spousal exemption the family home is usually not subject to Capital Gains Tax if one spouse occupies it as their main home, under “Principle Private Residence Relief”. What this means is that if you are the spouse who remains living in the family home and have done so throughout the ownership of the property, you will not have a Capital Gains Tax liability on disposal.
If you are the spouse who leaves the family home, then the rules have recently changed, and you will only be entitled to claim “Principle Private Residence Relief” against the full gain if the transfer or sale takes place within 9 months following the end of the tax year of permanent separation i,e you vacating. Previously this exemption was available if the transfer took place within 36 months, but this was reduced to 18 months in 2014 and is now 9 months since 2020.
If the transfer takes place after 9 months, then the amount of Capital Gains payable will all depend on what “gain” there has been (i.e., increase in value) and the amount of Principle Private Residence Relief available which will be based on the proportion of time you have occupied the family home. Remember you have an annual allowance which you can use, which is currently £12,300 per annum, which means if any “gain” is within this allowance, no Capital Gains Tax liability will be payable.
There is a circumstance where the departing spouse can continue to qualify for Principle Private Residence relief despite separating more than 9 months prior and this is where the property is transferred to the residing spouse and the following conditions are met: –
- It continues to be the residing spouse’s only or main residence;
- The transfer takes place under a Consent Order and a claim is submitted to HMRC within 2 years of the Order being made;
- The spouse who has left the family home has not elected a new “principal private residence” since vacating it.
Please note that if the family home has land and the whole property is over 0.5 hectares, “Principle Private Residence Relief” is only available to the home and garden.
What are the rules around other assets?
This is all dependant on when you separated during the tax year i.e., between 6th April – 5th April.
A married couple who have separated from one another can still take advantage of the spousal exemption available to them up until the end of the tax year in which they separated.
When does the tax become due?
For residential property there is a requirement to report and pay any capital gains tax to HMRC within 30 days of disposal.
NB. The law and tax allowances referred to above is correct as at 04.04.21. This article is provided for general information purposes only and does not constitute legal or other professional advice. Readers are advised to seek their own specific legal and tax advice.