Capital Gains Tax on Divorce

Tax is often quite low down the list of priorities as something to think about, particularly during a relationship breakdown. However, we recommend taking tax advice at an early stage during divorce proceedings. Unless you are properly advised by a taxation specialist, an unexpected tax bill may arise, which is the last thing you will want after thinking that everything has been finalised after getting divorced.

What is capital gains tax?

Put simply, capital gains tax is a tax on the profit that you make when you sell something that has increased in value. It is the gain that you make from selling the asset that is subject to tax, not the amount of money that you receive from selling the asset.

For example, if you bought a painting for £10,000 and then sold it for £30,000, you will have made a gain of £20,000. It is the £20,000 gain that would be subject to capital gains tax, not the £30,000 that you made from the sale of the painting.

However, there are some exceptions as certain assets are tax-free and you will not have to pay capital gains tax if all of your taxable gains in a particular year are under your tax-free allowance.

Does a capital gains tax liability arise on divorce?

You do not usually have to pay capital gains tax if you give assets to your spouse before your divorce is finalised. This is the case even if you and your spouse have separated, as long as you lived together at some point in the tax year that you transferred the asset. Otherwise, you may have to pay capital gains tax.

If you transfer an asset after you have divorced then you may have to pay capital gains tax on assets that you transfer after your relationship has legally ended. Your relationship will be legally at an end once the court has pronounced the decree absolute in your divorce proceedings.

Example: the matrimonial home

In most cases, the matrimonial home constitutes a significant part of a couple’s wealth. Therefore, it is common for the matrimonial home to be sold and the proceeds split between the parties. However, in many cases, the matrimonial home is not sold but rather the interest of one spouse in the home is transferred to the other. Such a transfer is a disposal for capital gains tax purposes and a taxable gain may accrue.

Since 6 April 2020, the spouse who moves out of the matrimonial home only has a nine-month window (known as “private residence relief”) in which to sell their interest in the home before capital gains tax applies to the proceeds of the sale. Thereafter, capital gains tax is likely to be charged at 28% on the departing spouses’ share in the matrimonial home.

What should you do?

The rules for working out your potential capital gains tax liability are complex and as solicitors we are not regulated to provide tax advice. You will need to contact HM Revenue and Customs or seek professional assistance from an accountant or tax adviser. They will need the following from you:

• The date that the decree absolute was pronounced in your divorce proceedings;
• A copy of any financial court order, where assets were transferred from one spouse to the other;
• A copy of any other agreement, where assets were transferred from one spouse to the other.

Summary

• No capital gains tax is payable on transfers between spouses in a tax year in which they are living together. This includes the year in which they separate.
• Where a transfer takes place after the year of separation, capital gains tax may be payable.
• Ideally, transfers of chargeable assets between spouses should, therefore, take place before the end of the tax year in which separation occurs.
• Seek advice specific to your circumstances from a taxation specialist as soon as possible.

Contact us

If you would like advice about the legal implications of your relationship breaking down, contact one of our family solicitors on 01628 631051 or email family@colemans.huntersserver.co.uk to make an appointment.

Categorised in: Latest news, Uncategorised

This post was written by Colemans Solicitors LLP