Capital Gains Tax on Divorce & Separation

Capital Gains Tax (CGT) is payable when an asset is sold or disposed of for more than its original cost, including any improvement expenses or selling costs. The standard CGT rates are 10% for basic rate taxpayers and 20% for higher earners. For residential properties, the rates are higher at 18% and 28%, except for gains eligible for private residence relief.

Tips – There are financial products that could allow you to defer CGT

Traps – There are a lot of rumours of the Labour government increasing CGT rates to equivalent rates to inheritance tax which could be up to 40%

Frequently Asked Questions

Spouses or civil partners can transfer assets to each other without CGT liability while married or in a partnership. After separation, this exemption only applies if the transfer happens by the earlier of

(1) the divorce or judicial separation order, or

(2) by the end of the third tax year following the year they separated.

Tip – Once a formal separation agreement or divorce order is in place, the couple has unlimited time to transfer assets on a no-gain, no-loss basis.

Trap – But if you do have a financial order, it is essential for separating couples to carefully plan asset division to minimise the tax impact and preserve value, seeking legal and tax advice as needed.

For CGT purposes, spouses or civil partners will be treated as separated when:

Or they are separated in circumstances that indicate the separation is likely to be permanent.

They are separated under a court order,

They are separated by a formal Deed of Separation executed under seal (except in Scotland, where the deed must be witnessed).

Tip – If the marriage or civil partnership has not legally broken down but the couple lives apart, they are still treated as living together for CGT purposes unless they meet the above criteria.

Trap – Moving out or living in separate households might constitute a separation.

No gain/no loss treatment refers to disposals where the asset is transferred between spouses or civil partners at a value resulting in neither a gain nor a loss for CGT purposes. This treatment applies to transfers made while the couple is still living together and can continue under a formal separation agreement or divorce order.

Tip – If one spouse transfers an asset to the other, the recipient inherits the transferor’s CGT base cost of the asset, and no gain or loss is recognised at the time of transfer.

Example: Imagine that Sarah and John are married, and Sarah owns shares worth £50,000. The original cost of the shares when Sarah bought them was £30,000. Sarah decides to transfer the shares to John while they are still married and living together. Under the ‘no gain, no loss’ rule, Sarah does not need to pay CGT on this transfer. Instead, John takes Sarah’s original CGT base cost of £30,000. If John later sells the shares for £60,000, he would calculate his gain based on the original base cost of £30,000 (the value Sarah had) and pay CGT on the £30,000 gain, not from the point he received the shares.

Transfers of property between spouses can be made free of CGT as long as the couple remains married or in a civil partnership. After separation, this exemption applies only until the end of the third tax year following separation or the date of the divorce or separation order, whichever comes first.

Tip – Once assets are part of a formal separation agreement or divorce order, the couple can make no gain/no loss transfers to each other indefinitely. However, without these agreements, transfers after the third tax year of separation may be subject to CGT.

Trap – Additionally, post-separation transfers are treated as transactions between connected persons until the decree absolute, meaning they are considered at market value, potentially triggering CGT liabilities on the spouse making the transfer.

Timeframe for Transfers: For separations after 6 April 2023, couples can transfer assets without triggering CGT until the end of the third tax year after the year they separated, or until the date of their final divorce or separation order—whichever comes first.

Example – If a couple separates in August 2024, they would have until the end of the third tax year after their separation to transfer assets on a no gain/no loss basis for Capital Gains Tax (CGT) purposes. Here’s what that looks like:

The tax year in which they separated runs from 6 April 2024 to 5 April 2025.

The end of the third tax year would be 5 April 2028.

This means they would have until 5 April 2028 to transfer assets between themselves without incurring CGT. If the couple finalises their divorce before that date, the deadline for no gain/no loss transfers would be the date of the final divorce order, rather than the third tax year..

Tip – Unlimited Time for Transfers Under a Formal Agreement (to take advantage of the no gain no loss): If asset transfers are part of a formal divorce agreement or court order, the no gain/no loss treatment can apply without a time limit, even after the third tax year.

• The end of the third tax year would be 5 April 2028.

This means they would have until 5 April 2028 to transfer assets between themselves without incurring CGT. If the couple finalises their divorce before that date, the deadline for no gain/no loss transfers would be the date of the final divorce order, rather than the third tax year.

CGT may be payable if:
• A matrimonial asset is transferred to someone else who is not your spouse.
• An asset is transferred to the other spouse after the end of the third tax year following the separation, or
• The asset is sold to a third party after the separation.

If the asset is the matrimonial home, it may be exempt from CGT. Additionally, if a chargeable gain arises on residential property, the tax must be reported and paid within 60 days of the disposal,
For other assets, the gain must be reported by 31 December in the year following the tax year of disposal. It is crucial to consider CGT implications when selling a house during a divorce.

If one spouse moves out of the matrimonial home and later transfers their share to the other spouse, it can be done without triggering CGT if the transfer is part of a formal divorce agreement or court order.

Also, if the remaining spouse later sells the home and gives part of the sale proceeds to the spouse who moved out, the spouse receiving the money can benefit from private residence relief, which reduces their CGT liability.

This relief applies as long as the home stays the main residence of the remaining spouse, and the transfer is part of the divorce agreement.

In short, CGT can be deferred if the right agreements are in place during the separation.

Conclusion

Divorce can be one of the most stressful life events, and while ensuring your immediate needs are met is crucial, the tax implications of any financial settlement should not be overlooked. Often, Capital Gains Tax has the most significant implications in divorce, alongside other potential tax consequences like those arising from dividend income or family trusts.

It is essential to seek expert tax advice early on in divorce proceedings to ensure all potential tax implications are addressed. Proper planning and advice can minimise CGT liabilities, preserving more value for both parties in the long run.

If you are navigating a divorce or separation us to get the best possible advice.

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