Spring is around the corner – and so is 5th April. This is a key date for separating couples when considering capital gains tax and transfer of properties.
Upon the dissolution of your marriage, capital gains tax is the most important tax consequence. The tax implications for both you and your spouse of any proposed payments or transfers should be considered before any order is made or an agreement reached.
What is capital gains tax?
Capital gains tax (CGT) is potentially payable to HMRC whenever there is a disposal of an asset which has gained in value since it was acquired. Disposal is defined as a transfer of ownership, a commercial sale, a gift or even a court order. CGT is payable by the person disposing of the asset.
If you have finalised your divorce without finalising your financial matters it is highly unlikely that you will be able to claim any tax advantages even if you separated within the last tax year.
What assets do capital gains tax apply to?
CGT applies to most assets which might be transferred between you and your spouse. This includes stocks and shares, residential properties, holiday lets and commercial properties.
Former matrimonial home
- The former matrimonial home is usually exempt from capital gains tax as it can be elected by one or both parties as the principle private place of residence. Separating couples have 9 months from their separation to elect the former matrimonial home as the principle private place of residence.
- If the family home is sold or transferred more than 9 months after you or your spouse vacated the property and the value of the home has increased, part of this gain in value will be taxable. How much is taxable will depend upon any CGT annual exemption. It may be possible to reduce this to a small amount or even nil.
- If your former matrimonial home has land and the whole property is over 0.5 hectares and is the principal place of private residence, relief can only apply to the home and garden.
If the transfer of a second property takes place within the tax year of separation then the transfer will be exempt from CGT. If you separated after 6th April last year you have until 5th April this year for this transfer to take place. It is possible to transfer the beneficial interest using a declaration of trust if you do not have enough time to do the legal transfer of the property.
Shares in a company
Capital gains tax is payable upon sale or transfer.
How does this affect me?
Every aspect of the tax system is linked to the financial year, 6th April to 5th April. A married couple who have separated can retain the tax advantages enjoyed by married couples until the end of the tax year in which they separate. If you separated after 6th April last year, it is important to transfer any property that is not the former matrimonial home, before 5th April this year if you wish to avoid CGT on transfer.
If you are considering transferring a property to your spouse or being a recipient of a transfer of any property, seek legal advice as soon as possible. You will need to obtain tailored advice in relation to any potential capital gains tax liability you may face and how to mitigate this.
Any transfers of properties that cannot benefit from the principal private place of residence relief and take place after 5th April last year will attract capital gains tax, even if you remain legally married to your spouse.
If you have any queries about this article or wish to book an initial free appointment to discuss your matrimonial matters and capital gains tax please contact Hannah Porter.