Capital Gains Tax (CGT) is a tax on profits when you dispose of an asset, either by sale or transfer.
There are no liabilities for transfers between spouses but when the transferee disposes of the asset, they will be liable for the whole gain.
Those going through a divorce, or dissolution of a civil partnership are also able to benefit from this principle up to the end of the tax year when they separated, or until decree absolute, whichever comes first.
Unfortunately, this often causes problems.
When a relationship breaks down one spouse will usually move out of the family home, in which case HMRC no longer treats this property as their main residence, and a clock starts ticking…
If the matrimonial home is to be sold, the spouse who has moved out has until the end of the tax year for the property to be sold. After this, they will subject to CGT on any gains made on the value of the property. This problem is exasperated if they split late in the tax year, reducing the window of opportunity to save CGT.
This provides the partner remaining in the home with an unfair opportunity. The longer it takes to sell the home, the more their ex-spouse has an exposure to potential CGT. They don’t. The cynic in me would be concerned about ex-spouses prolonging the sales process of the matrimonial home to financially penalise their former husband/wife.
Currently an individual can make a gain of £12,300 before being liable for capital gains tax, which is then charged at 10% for basic rate taxpayers and 20% for those liable for higher rates. If the chargeable gain is on residential property (but not your main residence) the rates are 18% and 28% respectively. For the spouse who moves out the house will cease to be their usual residence, therefore the 18% and 28% rates apply.
From April 2023, the annual exempt amount will reduce from £12,300 to £6,000 meaning that the gain will be smaller before a tax liability arises. The following year, it gets worse again, because the £6,000 will be halved to £3,000.
But there is good news!
From 6 April 2023, divorcing spouses will have three years from the year they stopped living together to make the transfer on a no gain/loss basis.
And if the assets are transferred as part of a formal divorce or civil partnership agreement, the timescales become open ended; the three-year limit does not apply.
The new rules will also apply to Mesher orders, meaning that spouses who are entitled to receive a share of the proceeds of the sale of the matrimonial home will benefit on a deferred basis.
Please be aware that these new rules only apply on transfers made after 6 April 2023.
When assisting clients with estate planning, I often recommend that cohabiting couples marry because this can be very advantageous to reduce inheritance tax (married couples can inherit their spouses’ assets and even their nil rate band and residential nil rate band). Not very romantic, but very tax efficient and most people are keen to save tax!
The same cannot be said when advising on divorce. It is very hard to recommend separating couples to remain under one roof until the house is sold to avoid CGT. There are limits as to how far people will go to avoid tax!
But at least when it comes to divorce – a hugely stressful time – the capital gains tax clock won’t be ticking as loudly, or at all.
David Lamb is Director of the Pension Sharing Service, is a Certified Financial Planner CFP™, a Chartered Wealth Manager, holds the Society of Estate Practitioners (STEP) Certificate for Financial Services Trusts and Estate Planning, and is a STEP Affiliate.