Capital Gains Tax When Getting A Divorce
You may be interested in our main article on Capital Gains Tax rates and allowances. You may also be interested to know how more about our services to help reduce your Capital Gains tax liability when you sell a buy to let property investment.
One of the greatest tax benefits of marriage and civil partnerships is the ability to transfer assets between spouses. These transfers are exempt from Capital Gains Tax. When separating or divorcing in a marriage or civil partnership, the CGT exemption is still available but there is a risk that you would trigger Capital Gains Tax (CGT) and potentially Stamp Duty Land Tax (SDLT).
It is highly recommended that you plan how assets are being divided with a solicitor and a Capital Gains Tax tax specialist. You will need a solicitor to guide you through the legal process and a tax professional to navigate through the tax pitfalls.
If you are separating or divorcing before the end of this tax year (April 5th), meet with a tax professional like Optimise Accountants. We can assist with divorce and capital gains tax questions.
What is the Capital Gains Tax Rate?
It is important for you to review the law surrounding Capital Gains Tax and the available exemptions during a separation or a divorce process. It is worth understanding the actual rate of taxation as a basic rate or high rate taxpayer. In doing so, you can see how much Capital Gains Tax you could be liable for if you do not follow a tax-efficient process.
The CGT basic tax rate is 10/18 percent, while the high rate goes up to 20/28 percent. The additional 8% is for people that sell residential property investments. You may need to familiarise yourself with the Capital Gains Tax rates and exemptions from our other article.
Transferring assets from one spouse to another using a deed of trust at the right moment can save you thousands in Capital Gains Tax and Stamp Duty Land Tax. This is particularly the case when you wish to sell assets to a third party. You can save a lot of CGT by simply transferring assets to the basic rate taxpayer from the high rate taxpayer
Each person’s Capital Gains Tax allowance is £12,300 per year. This equates to £24,600 for each married couple. Capital gains under this threshold are tax exempt.
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The Capital Gains Tax and Marriage/Civil Partnership
Tax law sees both parties in a marriage/civil partnership as separate entities. This means that when one partner makes a capital gain or loss only they face the tax ramifications.
You have the ability to transfer assets between partners whilst still living together and married without any Capital Gains Tax liability. Please note that you may need to think about the Stamp Duty Land Tax issues of transferring mortgage debt between husband/wife/civil partner.
The exemption from the Capital Gains Tax remains in effect until the marriage ends in divorce or when one party leaves the marital home. CGT is not just based on divorce, it may be triggered because you have simply left the matrimonial home.
How Should We Document a Gift? The Benefits Of Using A Deed of Trust.
You can accompany transfers with a written legal document when explaining the intention behind the disposal in reference to the Capital Gains Tax. While you are unlikely to need this proof, it is good to have in the event your gift is ever challenged.
By setting up a clear transfer from one spouse to the other, even during divorce, you avoid accusations from HMRC. This is typically done using a deed of trust to demonstrate a gift from one spouse to another.
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How the Law Sees Your Marriage/Partnership
The law considers you married until otherwise stated. The definition of “living together” covers all physical living arrangements. When an official separation has taken place, couples are no longer “living together.”
An official separation begins with three possible events.
– a physical separation has occurred and is unlikely to change.
– a court order will also make separation official.
– a formal Deed of Separation to declare their separation. This occurs under seal or witness when granted in Scotland.
When spouses live apart without official separation, they are still considered “living together.” This is still the case even if one spouse spends the week working in London in a separate apartment and commutes home for the weekend. You are still considered “living together” for tax purposes.
All spouses living together (as officially defined) can transfer assets without taxation under the Capital Gains Tax rules. As soon as an official separation occurs, rules regarding taxation on transfers between spouses begin to change.
Many people fall foul of CGT tax rules because they are not aware that the liability may exist if they leave the matrimonial home. We have mentioned this several times in order for readers to understand this very important point.
The First Year of Separation/Divorce
Unique tax rules apply to CGT and SDLT in the first year of separation or divorce. The tax year runs from 6 April until 5 April the following year. If you were officially living together during that time frame, your tax position falls into a grey area.
You have the entirety of the year to make exempt transfers to each other as if you were still officially living together. These transfers will be free from CGT as previously stated.
Tax law becomes more complicated as you reach the 6th April following the separation. Any transfers that occur between you after this point in time face different rules.
Make sure you are getting the tax benefits as well as complying with tax law. Work with a tax professional such as Optimise Accountants. We can help you navigate the challenges of the Capital Gains Tax and divorce.
What about the Matrimonial Home?
Disposing of a home to a third party may benefit from Private Residence Relief (also known as Private Property Relief). This means that you will not have to pay CGT when selling a home because of a separation or divorce. You may only seek relief on one residence.
During separation, the spouse who moves out may assign their stake in the home to the other spouse. However, if you wait too long (9 months or more) the Private Residence Relief is limited. After the nine months, you may be liable to pay CGT even on your main home.
You may both seek relief on your individual main residence if you have been separated and living in individual residences. However, this also means that you may have to pay CGT on the property that is not your nominated primary residence.
Transferring unencumbered (without a mortgage) properties before separation is ideal, as spouses are not subject to the Stamp Duty Land Tax when transferring to one other.
Capital Gains Tax After Separation or Divorce
It is worth looking at an example of how Capital Gains Tax works when you are in a separation or divorce process.
Sarah and Jim decide to part ways. Jim leaves the home on 1st January 2020. They try and make things work whilst being apart but this does not work out. Jim agreed to sell his share of the house to Sarah on 30th June 2021. This is now 18 months after the separation.
Please note that they are not yet divorced but they are legally separated. As such Jim will benefit from the time he lived in the property plus 9 months for Private Residence Relief.
Jim and Sarah bought the house in January 2018. This means that they owned the house for 30 months.
Now we have to look at the financials:
£400,000 was the market value and transfer value of the house from Jim to Sarah in June 2021
£300,000 was the purchase price of the property on January 2018
£100,000 is the gain but this is limited to 50% for Jim
£50,000 is the Capital Gain made for Jim
We know that Jim would benefit from Private Residence Relief. However, Jim has to pay £3,000 Capital Gains Tax within 30 days of transferring the matrimonial home to Sarah.
Jim could have avoided the CGT liability had he spoken to a Capital Gains Tax specialist such as Optimise Accountants.