Capital Gains Tax on divorce or dissolution: Do you need to take steps before the end of this tax year?

On divorce or dissolution of a civil partnership, important timescales apply when considering the potential impact of Capital Gains Tax (“CGT”).

Any couples that have separated in this current tax year should take immediate advice and consider whether making transfers between themselves before the end of this tax year (i.e. on or before 5 April 2022) could be beneficial. 

Transfer of Assets During Marriage or Civil Partnership

Whilst married, or as civil partners, assets can be transferred between the couple without any CGT arising. If a wife transfers to a husband an asset that has significantly increased in value, no CGT is payable and the husband, effectively, stands in the shoes of the wife and is deemed to have purchased the asset at the same time and for the same price that the wife originally acquired it for. No capital gain or loss arises. 

Transfer of Assets After Separation:

• (i) Transfers during the tax year of separation

If the married couple/civil partners have lived together during a particular tax year prior to the separation (which is likely to be permanent) and a transfer is made between them before the end of that tax year (the tax year of separation), that couple can make transfers to each other at no gain/no loss as would be the position if they were married.

So, for example, if a couple separate on 1 January 2022, they can transfer assets between each other at no gain/no loss on or before 5 April 2022.

• (ii) Transfers on/after 6 April and tax year of separation before decree absolute/final order

Once permanently separated, the couple are considered to be connected parties for CGT purposes until the date of decree absolute/final order.

The effect of this is that any transfer is deemed to take place at market value whatever price (if any) is actually paid and if the asset has risen in value, then CGT will be paid by the transferring party, subject to any applicable annual exemption, release or losses.

• (iii) Transfers after decree absolute

Transfers after decree absolute will generally be for actual consideration rather than market value (unless the transfer is not at arm’s length, which would include any gift).

Key Points

• Considering the division of assets early in divorce and taking appropriate advice is critical.
• Take legal advice as well as tax advice on separation; tax implications can make a significant difference to a financial settlement.

Principal Private Residence Relief (“PPR”) 

A potentially very valuable relief can be available upon sale or transfer of a dwelling house which has been the owner’s only or main residence. It is very common when a relationship breaks down for one of the couple to permanently move out of the family home during negotiations.

This can jeopardise this relief unless the potential tax-payer is eligible for an extension. The effect of the extension is that, provided the dwelling house has qualified for PPR at some point during the individual’s period of ownership, then the last nine months continue to qualify for relief, even if during the period the dwelling house is no longer the individuals only or main residence. Please note a longer period is permitted if one of the parties is disabled.

There is also a provision whereby, on a marriage breakdown where one of the couple leaves the family home then they (the departing partner) can continue to qualify for PPR. This is however subject to a number of strict conditions being met (and in relation to which specific advice would need to be sought based upon the individual circumstances).

Key Points

• Consider the tax implications before moving out of your home.
• You may need to act quickly.

Potential Changes in the law

The Office for Tax Simplification on reviewing CGT, has recommended that the Government should extend the “no gain/no loss” window on separation of a couple to the later of:

• (i) The end of a tax year at least two years after the separation event; or
• (ii) Any reasonable time set for the transfer of assets in accordance with the financial agreement approved by a court or equivalent process in Scotland.

The Government announced in November 2021 that this recommendation has been accepted and they will consult on the detail over the course of the next year. It is, therefore, unlikely that the changes will come into effect from April 2022, but if implemented, they may come into effect in April 2023.