Will I have to pay Capital Gains Tax when I separate?
Many people are not aware that, by moving out of the family home, they may have to pay Capital
Gains Tax at a later date. Capital Gains Tax (“CGT”) is a tax on the profit you make when you sell, or dispose of, an asset that has increased in value. Tax is due on the gain in value.
A CGT liability often occurs in respect of the sale or transfer of shares or property as part of a financial settlement upon divorce.
Most people will be entitled to a CGT annual exemption, which is a tax free allowance that reduces the taxable gain.
Under current rules, assets can be transferred between spouses and civil partners at “nil gain nil loss”, i.e. with no CGT consequences. This relief continues in the tax year of separation. For example, if you separate on the 10th April 2023 you would have until the 5th April 2024 to make any transfers free from CGT. If, however, you separated on the 1st April 2023, you would only have had 5 days (i.e. until the 5th April 2023) to make any CGT free transfers.
Private residence relief may be available if one party leaves the main residence/family home and their share is disposed of (either through transfer to the other party or through sale of the property). Until 6th April 2023, this relief was available for the period that the property was the main residence and the last 9 months of ownership. Those rules did commonly penalise the party who had left the family home, in the event any settlement took more than 9 months to agree.
New rules came into effect on the 6th April 2023, which changed the rules applying to transfers between spouses and civil partners in the process of separating. The new rules now give parties up to 3 years (up from 9 months) in which to make nil gain nil loss transfers between themselves when they cease to live together and unlimited time if the assets are the subject of a formal divorce agreement (whether made by consent between them or following a court order). Reliefs are now available to the nonresident party (i.e. the person who has moved out) once the property is eventually sold.
When you are considering separation and looking at the associated financial matters, it is always important to consider CGT implications early in the process. Many people are not aware that they may have to pay CGT in the future, following separation. You should therefore obtain tax advice from an accountant before taking the step of permanently vacating the property. This will ensure you are fully informed and understand the potential CGT consequences that may apply to you before you take the step of moving out.
Specific relief may be available, which allows private residence relief to apply to the whole period between leaving the property and the disposal if:-
- The couple separate and
- One party leaves the property and
- The leaving party’s share is subsequently transferred to the other spouse/civil partner as part of a financial settlement and
- The leaving party does not make a private residence relief election for another property during the relevant period.
