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Separation and the Capital Gains Tax Trap

View profile for John Boon
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Separating from your spouse or civil partner at the wrong time could result in you having to pay Capital Gains Tax (CGT) that you could otherwise avoid.

CGT is payable when you dispose of an asset whether you sell it, gift it or are ordered to transfer it by the court within the divorce proceedings.

The tax is calculated at 28% of any gain for residential properties and 20% for any other assets, such as business premises or stocks and shares and some types of personal belongings. These rates are for higher-income taxpayers. The first £12,000 of capital gains (for 2019/2020) tax year is exempt.  Some gains might be taxed at the lower rates of 18% and 10% for basic rate taxpayers.

The gain is the increase in the value of the asset between the time you sell, gift or transfers it and the time you acquired it or the 31st March 1982, whichever is the most recent.

Transfers made between spouses or civil partners are usually exempt from CGT.  A wife could transfer a house that she owns in her sole name, or shares in her company, to her spouse and not pay any CGT. 

Transfers between separated spouses or civil partners, however, might not be exempt even though there has not yet been a final divorce.  This is important as couples often live separate and apart for many months, even years, before a final divorce or financial order is made.

In these situations, even though they remain as spouses or civil partners, the spouse exemption to CGT will not apply if the couple has separated and if the transfer of the asset takes place after the end of the tax year (5th April) in which they separated.

An example 

Simon and Barbara have a jointly owned family home, a couple of buy-to-let properties – one in joint names that they bought together in equal shares and one in Barbara’s sole name – and a set of fine art paintings that Barbara had collected before she met Simon.

They separate in May and agree, over the following months, that Barbara will keep the family home and transfer the two buy-to-let properties and the art collection to Simon.

Their agreement is finalised by a consent order and decree absolute being sealed by the divorce court the following February. 

No capital gains tax will be payable; the disposals are taking effect in the same tax year as the parties’ date of separation and the spouse exemption will still apply.

Note that a sealed court order with decree absolute immediately changes ownership of the assets for these purposes even though the arrangements to implement the transfer of the properties or deliver the paintings could still take some time.

A second example

If Simon and Barbara separated in March then it will be very difficult to arrange for the disposal or transfer of assets within the same tax year i.e. by the following 5 April. They would have only weeks to reach an agreement before the relevant tax year ended.

In these circumstances, Barbara would have to pay the CGT on the buy-to-let properties and painting collection. 

CGT is paid by the person who is letting go of or disposing of the asset.

She would have to pay 28% of any increase in the value of the house in her sole name. This could be a considerable amount.

She will also have to pay 28% on one-half of the jointly owned buy-to-let property, being the increase on her half of the capital gain.

The painting collection might also attract a CGT liability but note that this will be at the lower rate of 20% because it is not residential property.

The rules relating to the family home are slightly different because of the application of private residence relief. This relates to gains in the value of a home that has been treated as a primary residence – typically the family home - and will be the subject of a future article.