Capital Gains Tax Liabilities on Divorce, Dissolution and Separation

by Kate McCormick

This guide explains the situation concerning Capital Gains Tax when couples separate and sets out some important points to consider.

Capital Gains Tax (‘CGT’) is probably not the first thing a separating couple think about when going through the unpleasant task of dividing up their belongings and assets between them. However, it should be an important consideration and can have significant implications on how a couple decide to sort out their financial arrangements and even when they decide to separate.

Where a couple is still together

When a married couple or couple in a civil partnership are living together, although they are treated as separate persons for CGT purposes, any transfers of assets (apart from trading stock) between them are ignored whilst they are living together. Any gain or loss made is not taxed until the receiving member later disposes of the asset to someone else when CGT will be assessed according to the gain or loss made on the whole period of ownership subsequent to 31 March 1982. If the couple are not living together, CTG is payable on a transfer between them but is assessed on the market value of the asset transferred, at the time of transfer. Couples are deemed to be living together for CGT purposes if they are still in the relationship, whether or not they are actually living together. So, they will be living together unless they have a court order or formal deed of separation or can be reasonably regarded as permanently separated.

If one person holds an asset on behalf of the other or both, CGT will be payable by the person who owns the ‘beneficial interest’ in the asset, when the asset is transferred to someone else. They will need to consider whether any written agreement is in place between them regarding beneficial ownership, who paid for the asset originally and how the proceeds of sale have been allocated, when deciding how the CGT liability should be apportioned. You should seek the advice of a Solicitor if you need assistance in evaluating whether an asset is beneficially owned by either or both of you. This is because the title deeds (to a property for example) may only name the legal owner.

Where a couple has separated

When a couple have stopped living together, for CGT purposes, provided they were doing so earlier in the same tax year, they can transfer assets between each other in the same tax year, without incurring a gain or loss, as if they were still living together (see above). Therefore, if a couple separate at the end of May, they will only have a few days to transfer any assets between each other whilst the no gain/no loss rule applies. So it may actually be extremely advantageous for couples to arrange for the transfer of assets as soon as they have separated and before a divorce is obtained, although the last thing they probably want to do at that time is to transfer assets over to each other. This rule has been criticised in that it does not take account of the lengthy amount of time that it can sometimes take to obtain a decree absolute of divorce and complete a divorce settlement and leads to unfair results between couples, based on the time of separation.

After that tax year has ended and/or the couple have obtained a decree absolute or final dissolution order, the no gain/no loss rule ceases to apply and other rules are applied to determine the date of the transfer and the consideration on disposal. The amount of CGT that will be payable will depend on the type of asset concerned and the period of ownership.

Transfers of certain assets do not incur CGT in any case. These include:
• personal car;
• personal possessions worth less than £6,000 each;
• stocks and shares in tax-free investment savings account such as ISA’s;
• UK government or ‘gilt-edged’ securities such as Premium Bonds;
• winnings from betting, lotteries or the pools;
• compensation received for personal injuries;
• foreign currency held for personal use outside the UK.

It is important to keep a record of the date of determination of the marriage or civil partnership by decree absolute or dissolution and the date of any court order or contract to transfer the assets concerned.

CGT Reliefs

Private Residence Relief applies to transfers of the matrimonial home from one member of a former marriage or civil partnership to the other, following divorce or separation. For the relief to apply, the residence must have been their only or main residence whilst they were living together (but one of them may occupy a different residence afterwards). However, if one member has moved out, the transfer must take place within three years of their moving out date, for the full relief to apply.

There is a concession in that if the party that has moved out’s interest is transferred later than three years from the date they moved out (for example where the court has ordered that one party can stay in the property with the children until they reach a certain age and only then it is to be sold and the proceeds shared out), they can obtain relief from the date of their moving out to the earlier of the date of transfer or the date that the other member stops using the residence as their only or main residence. It is only possible to claim relief for one property over a certain period though so if the party that has moved out has another principal residence, they will have to elect whether to pay CGT on their new house or the old one during this period. Private Residence Relief does not apply to buy-to-let properties, agricultural land, farm buildings or business premises, although other reliefs may apply if this is the case. Neither does it apply to any part of a house that is used exclusively for business purposes. Periods of absence of up to three years are ignored when assessing whether a house has been used as a principal residence provided the couple have lived in it as a principal residence immediately before and afterwards unless the property is disposed of immediately following the three years’ absence. Longer periods of absence are permitted for employment-related reasons.

If either person has a second property, they may elect within two years of purchasing it, which property is to be regarded as their principal residence.

Hold-over Relief may apply if an asset is transferred after the tax year that the couple stopped living together but prior to them having received a decree absolute or final dissolution order, provided there is no actual or deemed consideration for the transfer i.e. it is transferred as a result of a court order or earlier agreement for which consideration has already passed. This relief basically allows any gain to be ignored on the transfer and postponed to the date that the recipient later transfers the asset. The gain for the earlier transfer is then deemed to have been at market value.

The Inland Revenue has recently changed its practice in relation to consideration on transfers made in accordance with court orders under the Matrimonial Court Orders Act 1973, following the High Court case of G v G [2002]. Consideration is now no longer deemed to have passed where the transfer was the result of an order for ancillary relief under the Matrimonial Causes Act 1973 or formally ratifying an agreement.

Advice

It is important to keep accurate records if you own any valuable assets as this will make it easier to work out any tax liability when the asset is later transferred. Important information includes dates of acquisition and disposal or transfer and all costs and consideration given/received on acquisition and disposal.
If you are going through a divorce or separation it is always advisable to obtain expert tax advice from your Solicitor and/or Accountant before transferring any assets, as you may be struck by an unexpected tax liability if you are not careful.