Capital Gains Tax on Divorce or Dissolution

What is capital gains tax?

When you dispose of an asset you have to pay capital gains tax on the "gain" or profit made. Any transfer of assets between civil partners/spouses is generally treated as though no loss or gain is made, so no tax is payable, provided certain criterion are met.

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Criteria

What are the criteria?

While you are married or in a civil partnership you can transfer property to your civil partner/spouse without any capital gains tax being paid as long as you have lived together for at least part of the tax year in which the transfer occurred. However, when they subsequently dispose of the property they will be liable for tax on all capital gains made for the period that both of you owned it. The liability for capital gains tax already arising therefore passes to your civil partner/spouse with the property.

The benefit of these rules is not lost upon divorce/dissolution but at the end of the tax year in which you separated. Should you separate during a tax year then any transfer of property made during that tax year is treated as though you had not separated, as above.

You are entitled to the benefit of private residence exemption for the period that you have occupied the family home as your only or main residence. For this purpose you are deemed to have occupied it for the last 3 years of ownership irrespective of where you have lived. If you have only lived in the property part of the time then the relief is reduced proportionately.

If the house is sold within 3 years of separation the sale is capital gains tax exempt. If the house is sold more than 3 years after you left the home then your share of the capital gain may be taxable. Any civil partner/spouse that continues to occupy the home after separation continues to qualify for the exemption.

Where the house is transferred between civil partners/spouses, then the party who moved out is regarded as having continued to occupy the home, so there is no capital gains tax on the transfer, as long as:

  • It took place within 3 years of separation
  • It is transferred to the civil partner/spouse who remained in the property
  • It is transferred under a financial settlement to the civil partner/spouse who moved out and they have not elected to treat another property as their only or main residence for capital gains tax purposes in the meantime.

Where none of the above exemptions apply, then capital gains tax will be payable, but the amount of tax will be reduced, proportionate to the amount of time the property was the main residence. Even if the transfer is not chargeable for capital gain, when the property eventually comes to be sold, capital gains tax will be payable.

The gain on disposal of other matrimonial assets may be reduced or eliminated by other exemptions or reliefs including annual exemptions and taper relief. Advice from an accountant may therefore be required.

What is clear is that delay in resolving financial issues may increase any tax liability you have to pay when the assets are finally dealt with. It is therefore important that you obtain prompt advice.