Beyond the balance sheet

In the divorce process? The Capital Gains Tax issues you need to avoid

Debbie Austin 18/2/2020 6 minute read

Debbie Austin FCCA on why divorcing in January can create potential additional tax and financial headaches for many.

The statistics tell us 42% of marriages end in divorce!

Furthermore the divorce rate among married couples is highest for men aged 45-49 and women aged 40-44 according to the ONS. This also happens to be the age range when people usually acquire a lot of assets. The first working Monday of January has been labelled 'Divorce Day' by lawyers! Apparently this is when they receive the most enquiries from couples who are unhappy in their marriage.

Money troubles and the stress of Christmas are the common cause of this. A fortnight break with an unwanted spouse can result in people being pushed to boiling point. Consequently January and February seem obvious months to commence the divorce process. Obvious certainly, but from a somewhat cynical tax perspective it's a big potential error.

The reason being there's less than 3 months to the end of the tax year on 5 April and that can make a very considerable difference to the planning and the reliefs available to you.

Find out how to mitigate your CGT exposure in the divorce process >

Tax and the transfer of assets

In a marriage, either partner can transfer assets to the other with no exposure to tax so long as they can prove they lived together during the tax year in question and have not separated. When you're divorced however, this is no longer possible. Instead such transfers to an ex-spouse result in the application of capital gains tax (CGT) on any notional (estimated) gain made by the transferor.

To explain, the person from whom the asset is moved is referred to as the transferor. The person who receives the asset being transferred is the transferee.

If you're considering divorce then as part of the settlement for example, you could transfer a £200,000 painting to your spouse. Let's say its value today is £100,000 more than when you purchased it. As the transferor, if you do this before the end of the tax year then there's no tax bill. However, if you do it after 5 April and, assuming you've already used up your £12,000 allowance, then you will be exposed to 20% CGT, resulting in a £20,000 tax charge!

If it's a residential property that you're transferring then this results in a greater CGT rate of 28%!

Unfortunately the wealthier you are, the more likely you'll own things such as collectibles, antiques, and real estate. Being illiquid assets they'll be difficult to dispose of, due to their expense, meaning it could take time to sell them.

What happens when you're in the stages of getting a divorce

When you're divorcing, namely something in-between married and divorced, then specific rules are applied. 

In such cases you have until the end of the last tax year in which you lived together to transfer the assets and not expect a CGT charge. Furthermore you can't just live together having officially separated and continue to transfer assets and not get taxed.

Transferring requires you to live cordially with the person you're in a relationship with. If you have a deed of separation or a court order then this in effect means your split is permanent and in place. That puts paid to splitting up but continuing to live in the same house. You then have to arrive at a settlement and transfer your assets by the conclusion of the tax year.     

The family home - CGT and divorce

With regards to the family home, this is where things can get particularly difficult (emotionally) and messy (from a tax perspective). Often in cases of separation one of you will move out of the home. In terms of tax this used to not be an issue because legislation usually provided sufficient time to sell the property before being exposed to taxation on the uplift in the price.

This worked on the basis of principal private residence (PPR). This tax relief was designed to enable taxpayers to sell their homes without having to pay CGT. To claim PPR, the property has to be your main residence. Let's explore PPR and CGT so that you understand their purpose and then we'll revisit how this impacts in terms of divorce and the family home. 

If you sold your property and it hadn't been your main residence for the entire time then you'd be exposed to some CGT on the proceeds. As an example a person might own 2 properties and have to move out of their home to renovate it. In such a scenario CGT is applied based on the proportion of time that the property that was sold wasn't the taxpayers main residence.

Going back to the divorce scenario, say you're the party that has to move out, provided the property was your only or main home, this meant the last 18 months qualified you for PPR relief. That applied whether or not you (the owner) remained living in the property during this period. This exemption period often allowed sufficient time for the practicalities of matters including splitting up, selling, and moving.

Changes to the PPR exemption period

However, from 6 April 2020 the 18 months of exemption will be reduced to 9. Suddenly in a country where property transactions are notoriously slow, you'll face a very challenging timeframe in which to sell up.

Go over the 9 months and you'll be exposed to a CGT charge at 28% on the gain for one of the party's share of the property. Therefore you may need to consider the current state of the housing market on the duration of a sale. Whether it's booming and fast, or sluggish and slow, could influence how much tax you're likely to be exposed to.

Some potential tax solutions for how to divorce

  • Don't do it, re-work on your relationship and have a go at continuing the marriage.
  • If it's a split, then ensure you're sufficiently co-operative so that transfers can be agreed upon and made, preferably at the start of the tax year, and before the divorce is finalised.
  • Don't move out of the family home until absolutely necessary, otherwise it could result in a significant CGT bill.
  • When splitting, budget and prepare for a time consuming legal break up process. The alternative of divorcing in under 2 years requires the blame of one party on the grounds of unreasonable behaviour, or adultery. This involves legal advice, costs, and likely ill-feeling between both sides.

The good news on the last point, if there can be any good news in a divorce, is that a bill is being debated in Parliament to establish "no fault" divorces. The aim is to simplify the rules and try to save couples time and money as they implement what has historically been a very costly process.

Remember, each and every situation is different. If you're splitting, or have split from your partner, then be sure to seek professional advice especially on the potential tax implications.
New Call-to-action

This post was created on 22/01/2020 and updated on 18/02/2020.

Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.


leave a comment -

Popular posts

8 Key elements of a business plan you need to know
How to understand the different types of shares & class of shares
What are the different types of business structures in the UK? How to choose one