Capital Gains Tax and Divorce
Capital Gains Tax (‘CGT’) can be quite complicated when it comes to finances following a divorce, with snags to trap the unwary. And the detail can be very important, so you should always take advice about your own particular situation from a solicitor who specialises in divorce law finances and tax, or from an accountant, rather than relying on general guides
For a lot of people who are divorcing, CGT is not an issue, because their main asset is their home which gets special treatment. There are Capital Gains Tax issues you need to be aware of, particularly if one of you moves out of the house for a long period of time before it is sold or transferred to the other. There were some important changes in those rules in 2020 which you can read about here Tax changes for divorcing couples (appletreefamilylaw.com)
But other assets, including second homes, businesses etc can attract Capital Gains Tax. Where one of you transfers such an asset to the other, that is generally treated as a “disposal” for CGT purposes giving rise to a charge to tax usually payable within 30 days the date of the transfer. That applies equally on a transfer of a share of such an asset. So for example where an asset which is owned in joint names is transferred to one of you, HMRC will usually treat that as a disposal by the person who is transferring it, to the person who is receiving it .CGT is payable by the transferor, so that person has to make sure they have some way of paying the tax.
Special rules apply where the transfer takes place between a husband and wife or between civil partners who are living together. For them HMRC rules say that the transfer should be deemed to take place at the same value as the value which applied when it was originally acquired. This is known as a “nil gain nil loss” transfer and the effect is that no tax is payable. As always there is a catch – if the person who the property is transferred to (let’s say the wife) sells it a few years later, her CGT is calculated on the assumption that she paid whatever price was paid when the asset was originally acquired by her husband. So she pays more tax than she would have paid if the tax were calculated based on the value at the date when it was actually transferred to her. But on the other hand she may never sell it - she may keep it until she dies, in which case it could be subject to Inheritance Tax but that is another matter. And it provides an opportunity for some tax planning.
But under present rules “nil gain nil loss” ceases to apply at the end of the tax year in which the husband and wife (or civil partners) separate. So couples who separate in May have almost a year to think these things through and make plans. But if you separate in March you can have a real rush to sort things out before the tax year ends on 5 April. Most years I am running round in those last few weeks of March, try to sort things out for somebody, with the risk that if they don’t do it within a couple of weeks they will get hit by a tax bill. And if they can’t agree to do it, it’s very unlikely that any court proceedings will be concluded within a year, by which time the ‘nil gain nil loss’ window will be closed.
Two proposed changes will ease some of that pressure. First the government have proposed that, in future, the “nil gain nil loss” window will remain open for up to 3 years after the date when the couple separated. Second the government have proposed that a transfer under the terms of a formal separation agreement (presumably a court order as well) will be treated as ‘nil gain nil loss’ whenever it takes place, within reason. So this should give separating couples plenty of time to decide what they want to, and even go to court if they can’t agree.
If the new rules come into effect, they are expected to apply to disposals that occur on or after 6 April 2023.
https://www.gov.uk/government/publications/capital-gains-tax-transfers-of-assets-between-spouses-and-civil-partners-in-the-process-of-separating/capital-gains-tax-separation-and-divorce (link to gov.uk website)
PS: CGT for beginners:-
If Capital Gains Tax (CGT) is a new subject to you here is a brief intro: Broadly speaking it is a capital tax designed to tax people who buy an asset and then sell it a few years later making a profit, contrast people who have an income, on which of course they would pay Income Tax.
Essentially CGT is calculated by taking the value of the asset at the date of sale, deducting the value at the date of original acquisition, which gives you the profit (or ‘gain’ in tax parlance) on which tax is paid . You can deduct an annual exemption then you pay tax calculated as a percentage of the difference. As always these things are best explained with a simple example;-
Suppose you buy a house for £200,000 and rent it out, you have to pay Income Tax on the rent. But if you then sell the house a few years later for £300,000 CGT is payable, broadly, on the profit which is £300,000-£200,000 = £100,000. You have an annual exemption which you can take off (roughly £11,000) then you pay CGT as a percentage of the balance, so a percentage of £89,000 in this example. In fact the details of the rules and calculation can become complicated, because certain expenses incurred along the way can be deducted, and there are various reliefs.
But a sale is a simple example, and at least you have the sale money to pay the tax from. Under HMRC rules CGT is payable not just on a sale of the property, but on any “disposal” which could include a gift, or a transfer to your ex husband or wife. In that case not only are you giving the asset away, you also have to find the cash with which to pay the tax. Which is not always easy, particularly because most people are feeling very cash-strapped as they go through a divorce.
Health Warning :This post is intended as a general guide only – tax is a very complicated subject, and getting it wrong can be very expensive so it is important to obtain expert advice about your own situation, I can certainly accept no responsibility for any loss you might suffer as a result of relying purely on the information on this website.
John Pratley is an expert divorce lawyer, who has more than 25 years’ experience advising clients purely about divorce and related family law issues, such as the financial consequences of separating and divorcing. After establishing the first niche family law practice in Bristol, and going on to senior management roles in a national firm, John set up Apple Tree Family Law in 2018. Apple Tree Family Law solicitors specialise in advice about divorce and financial issues.
We are based in Bristol and Exeter, but we have clients all over the UK and further afield. We offer, simply, clear and accurate advice about divorce and family law issues, and the very best client service, for a clear and reasonable price.