Capital Gains Tax On Divorce

Are you going through a divorce? Be conscious of the Capital Gains Tax consequences of your split. With foresight, the right tax planning can mitigate potential liabilities as a result of asset transfers ...

The commonest asset transfer between divorcing spouses or civil partners is a Spousal Transfer. These are usually made at a nil gain/nil loss, meaning the person receiving an asset is treated as paying an amount equal to the original purchaser's cost for the said asset. This means neither a gain nor a loss arises for the person transferring it.

"However, conditions for 'living together' must be met at some point during the tax year!"

This is regardless of if the parties involved were actually living together at the date of the transfer. Current legislation means that spouses are seen as living together unless they are separated by:

- a court order
- a Deed of Separation
- in circumstances where the separation is going to be permanent

If the divorce is finalised in the tax year the spouses separated, the nil gain/nil loss rules apply. However, remember that the amount of deemed consideration becomes the base cost of the asset for future disposal by the spouse receiving it by Spousal Transfer.

A Spousal Transfer after the tax year of separation means the nil gain/nil loss rules cease to apply. The disposal date for Capital Gains Tax is treated as the date the divorce is agreed or the date of a court order. When the Decree Absolute happens after a court order, the date of the Decree Absolute is the effective date. Until this time, both spouses remain as connected persons.

"What about the matrimonial home?"

This is usually a substantial part of a married couple's wealth, and divorce usually means the matrimonial home is sold with the proceeds being distributed to both spouses.

When one spouse moves out, and the other has no intention to sell it, a Transfer of Interest may occur, meaning it is a disposal for Capital Gains Tax purposes and may incur charges. A CGT charge will apply when the sale/transfer occurs after 9-months of no longer living together.

However, don't discount Principal Private Residence Relief if the matrimonial home was your only residence for any period during the marriage. You should get relief for the proportion of time you occupied it during the total period of ownership.

"But this doesn't apply to a spouse who has another main residence during the time of living together!"

My blog post can only offer a broad outline, and there are other considerations that need to be made where assets are realised post-divorce. Your circumstances will always be unique, and I recommend you seek professional tax advice before making any financial decisions.

If you'd like to find out more about anything I've written here, do call me on 01908 774323 or leave a comment below and let's see how I can help you.