Posted by Nick Day on 29 Apr 2015
Tax on Separation and Divorce
Unfortunately, marriage breakdown is a fact of life. This article is intended to provide some initial brief guidance on some of the tax implications on separation/divorce but of course there is no substitute for consultation with a fully qualified tax adviser because circumstances will always differ on a case by case basis. The CGT rules for transfers of property on separation/divorce are complex, but in broad terms the rules are as follows.
The Family Home
If you have lived in a property as your main home throughout the period you have owned it, the capital gain/loss made when you dispose of your interest in that property is not normally taxable/deductible for CGT purposes. This is because of the “Private Residence Relief” (PRR) exemption due under these circumstances.
If for part of the period you owned the property it was not lived in as your main home, a corresponding portion of the gain/loss may not be covered by PRR exemption. However, certain periods of absence from the property can still qualify as “deemed” occupations for PRR exemption purposes, including the final 18 months of ownership.
Therefore, if you vacate the main family home after separating from your spouse, but you transfer your share of the property to them within 18 months, the transfer should not typically result in either a capital gain or loss. If for whatever reason the PRR exemption does not apply to the whole capital gain/loss, or if the property is not the main family home, for example, if it is a holiday home, a letting property or some other type of CGT chargeable asset such as shares, the following rules will need to be considered:
Transfers made prior to “decree absolute” (the legal document formally ending the marriage)
Up until the end of the UK tax year in which separation occurs, transfers between spouses are made on a “no gain/no loss” basis. In other words, transfers between spouses are still recognised as tax neutral. No capital gains tax is payable and the transferee inherits the transferor’s base cost of the asset for capital gains tax purposes.
Where the property transfer takes place after the UK tax year in which separation occurs, but prior to decree absolute, the transfer is treated as having been made at “open market value”, i.e. the consideration received by the transferor and the base cost inherited by the transferee are deemed to be the property’s open market value.
The transferor will therefore make a capital gain or loss depending on the property’s value at transfer, but specifically regarding any capital losses, these are restricted and can only be set against capital gains made on transfers to the same recipient spouse up to the date of decree absolute.
Transfers made after “decree absolute”
Where the property is transferred to the former spouse after date of decree absolute, the open market value deemed consideration treatment mentioned above will not apply and instead, the capital gain/loss is calculated based on the actual consideration received.
In some cases the consideration will be “nil” which could result in a significant capital loss for the transferor, and unlike capital losses arising prior to the decree absolute, restrictions do not apply meaning these capital losses can be utilised against any capital gains made in the same/future years. Conversely the transferee could own an asset with a relatively low base cost, resulting in a large capital gain when the property is ultimately disposed of.
Stamp Duty Land Tax (SDLT)
The SDLT position is more straightforward than the CGT position. SDLT is not payable if an interest in land or property is transferred as part of an agreement or court order because a couple are going through divorce proceedings.
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