Swindon Family Lawyer, Catherine Smith, explains how Capital Gains Tax can become an issue for married couples/civil partners on separation. Catherine is available on 01793 615011. You can also contact her by email, or by completing the Contact Form at the foot of this page.
Separating couples are often surprised to discover that divorce/dissolution of a civil partnership can result in liability for Capital Gains Tax (CGT).
Capital Gains Tax UK
The rules relating to CGT are complex, and it is always advisable to obtain specialist advice from an accountant. However, the general position is that special rules apply to gifts or assets you dispose of to your spouse/civil partner. In most cases, you will not be liable for CGT on assets you give or sell to them as long as you have lived together at some point during the tax year in which the disposal took place. This is because HMRC treats your spouse/civil partner as inheriting the asset at base cost, ie its value when you first owned it, so there’s no gain.
Note, however, that your spouse/civil partner may be liable for CGT if they subsequently dispose of the asset. In that case, the ‘gain’ will be the difference in value between the time you first owned it and the date they dispose of it.
What does living together mean?
Importantly, HMRC deems you and your spouse/civil partner to be living together for CGT purposes even if you are not physically residing under the same roof, unless you are separated:
- by a formal deed of separation;
- under an order of the court; or
- in circumstances that suggest the separation is likely to be permanent.
Cohabitation tax implications
If you and your partner are not married or in a civil partnership, you will not qualify for the same CGT exemption, even if you have lived together for a long time.
Capital Gains Tax after separation
Once you separate, you can only transfer assets to your spouse/civil partner free of CGT up to the following 5th April. After that, the transfer is treated as a gift and liable to tax. However, private residence relief may be available if the asset transferred is the family home (see below).
Private Residence Relief
If a jointly owned property is sold, a spouse/civil partner who has continued living there will pay no CGT if it has remained their main residence.
The spouse/civil partner who has moved out may be liable for CGT on their share of any increase in value. However, as long as conveyancing completion occurs within nine months (or eighteen months if the disposal was prior to 6th April 2020) of them moving out, the CGT private residence exemption still applies to their period of absence. After that, any gain is liable to CGT, but they will still have any unused portion of their annual CGT allowance (£12,300 for 2021/22) to set off against the gain, as well as any capital losses they have incurred.
If the property is not sold and the spouse/civil partner who has left transfers their share to the other within nine months (or eighteen months if the disposal was prior to 6th April 2020) of leaving, they will still benefit from the CGT residence exemption. Transfers after nine months are treated as a disposal for CGT purposes unless the following conditions are satisfied:
- the property is transferred to the remaining spouse/civil partner as part of a divorce/dissolution financial settlement (either by agreement between them or by order of the court); and
- no other property has become the leaving spouse/civil partner’s main residence; and
- the property remains the main residence of the remaining spouse/civil partner.
Subject to these conditions being satisfied, the leaving spouse/civil partner will qualify for private residence relief for the period between moving out until the date the property is transferred.
Further information is available in HMRC’s Self Assessment helpsheet HS281.