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Divorcing and separating couples beware, the Capital Gains Tax trap

“If I divorce or separate, I can transfer an asset like property, or investments to my spouse without paying any tax….They are exempt from tax, aren’t they?”

I often hear this and unfortunately there can be a sting in the tail. Tax can still be payable even if assets are being transferred between parties. Capital Gains Tax (CGT) has been around for a very long time and the rules relating to it are complex.

If you are the party who leaves the family home then CGT rules currently provide that you have 9 months following the end of the tax year, in which to sell or transfer your interest in the property before CGT may become payable.

CGT could involve a tax of between 18% – 28% on the departing parties share of the value of property.

The consequences of CGT could be particularly stark for divorcing or separating couples, who may have to choose between living together after separation or paying a CGT bill that they may struggle to afford when dividing finances between two households.

I am often asked to advise people who have been separated for long periods of time and may have delayed making decisions about dividing assets for years, not just 9 months.

Just because one party moves to rented accommodation, does not mean that tax is irrelevant. The position becomes even more difficult if the party who departs decides to buy a new property to live in.

If the transfer takes place after the 9 month window, then the amount of tax payable will all depend on what “gain” there has been (ie the increase in value since the property was purchased) and the amount of Principle Private Residence Relief available (based on the proportion of time you have occupied the family home).

Remember also you have an annual allowance for CGT which is currently £12,300p/a, so this allowance can be used towards offsetting some or all of any CGT payable.

There are circumstances where the departing party can continue to qualify for Principle Private Residence relief despite being separated for more than 9 months and this is where the property is transferred to the residing party and the following conditions are met:

– It continues to be the residing party’s only or main residence

– The transfer takes place under a Consent Order and a claim is submitted to HMRC within 2 years of the Order being made

– The party who has left the family home has not elected a new “principal private residence” since vacating it.

Couples contemplating separation or divorce should seek advice before moving out of the family home, or at the earliest stage possible.

Couples may often agree to share any CGT liability at the outset of any negotiations, in order to avoid a potential stumbling point later in the divorce process.

Recording a financial settlement in a Consent Order is also vital. Not only does it create certainty by formally resolving divorce financial claims, but as mentioned above, it could help alleviate a large tax liability.

For more information or to arrange your free initial consultation please click here to contact a member of our friendly, approachable and highly experienced Family Law department today.

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