While the subject of tax is not an exciting one it is one that could be imperative for separating couples, particularly if they have a property portfolio or substantial assets explains divorce solicitor Hannah Porter.
Upon the dissolution of a marriage, capital gains tax is the most important tax consequence. The tax implications for both people of any proposed payments or transfers should be considered before any agreement is reached.
What is capital gains tax?
Capital gains tax 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. Capital gains tax 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?
Capital gains tax 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 capital gains tax 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 capital gains tax. 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.
Separating before or after 6th 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. (5th April to 6th April).
If you are considering separation but have not as yet gone your separate ways it may be worth considering delaying separation during the final couple of months of the tax year. This however is not always the best solution and will depend on your personal circumstances and feelings.
If you separated after 6th April last year, then you may need to act quickly. It may be possible to negotiate a tax efficient solution or at the very least a plan can be put in place to avoid the worst case possibilities.
Divorce, Capital Gains Tax and Property
Those already separated also need to transfer any property that is not the former matrimonial home, before 5th April this year if you wish to avoid capital gains tax 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 divorce capital gains tax or wish to book an initial free appointment to discuss your matrimonial matters and capital gains tax please contact Hannah Porter on 01392 421 777 or email [email protected]
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