Parties going through a divorce will need to consider any tax issues they may have as part of their financial settlement. Any tax payable should be taken into account when carrying out discussions around settlement. When a marriage comes to an end, it is usual that there is a property that will either be sold, or transferred to one of the parties for example. Before consideration is given as to how such assets are to be dealt with, it is essential to consider whether any Capital Gains Tax (CGT) will arise, whether it be on the family home or any other capital assets.
When parties are married and continue to be in a relationship, if there is a transfer of assets between the parties, no CGT is payable. However if a married couple separate careful consideration should be taken. If the parties look to dispose or transfer assets, such as a property or business, within the same tax year as the separation, no CGT is payable on those assets. However, if a transfer of an asset takes place after the tax year of separation, the transfer of these assets will be seen as a gift, and therefore may have a potential liability for CGT.
In respect of the family home, this attracts a form of relief known as principal private residence relief (PPR). This allows the party who vacates the family home after separation to be deemed as occupying the family home for 9 months following the date of separation, therefore if a property sale or transfer takes place within the 9 month window, no CGT will become payable, even if the transfer takes place in a new tax year. If the transfer takes place after 9 months then professional advice from an accountant may be required to determine any gain, any annual CGT relief available, and the potential for the spouse who has vacated the home to continue to qualify for Principle Private Residence relief (this is subject to very specific rules).
When going through a divorce, married couples should always pay close attention as to whether there may be a CGT liability upon their proposed settlement. It is therefore important that any agreement reached in respect of matrimonial finances is placed into a formal court order, and seek legal advice as soon as possible during the divorce process.
Therefore a married couple who have separated in the current tax year should urgently take advice if they haven’t already done so, as there may still be time to take advantage of the current tax year which will come to an end on 5th April 2022.
At Ellisons, we have an experienced team of Family Lawyers who will be able to assist you in reaching a financial settlement, and sign post you to tax advice specialist if CGT may be an issue in your case. To receive advice, please contact our Family Team.