Capital Gains Tax on Divorce
If you’re separating from your spouse or civil partner, chances are that your Capital Gains Tax liability isn’t the biggest thing on your mind – however, considering how expensive the divorce process can be, knowing your Capital Gains Tax liability when transferring equity and assets between you is incredibly important to avoid paying more than you need to.
What is a transfer of equity?
A transfer of equity allows you to add or remove someone from a property’s title deeds and (if applicable) its mortgage. If you or your ex-spouse wants to keep the home you bought together (assuming that you are joint tenants), the person who is leaving the property will transfer their equity in the property to the person who is staying, who will usually pay them a sum of money in return. This is sometimes colloquially referred to as “buying someone out.”
What is Capital Gains Tax?
Capital Gains Tax is paid on the additional value certain assets have accrued when you sell (or otherwise dispose of) them. For example, if you bought a holiday let worth £500,000 and its value increased to £560,000 since you purchased it, you could have to pay Capital Gains Tax on the £60,000 increase in value. You have a tax-free allowance of £12,300 per year (at the time of writing), but you could have to pay tax on any gains above this amount. Assets that can incur Capital Gains Tax include personal items worth up to £6,000 (excluding cars), property that isn’t your main residence (unless you have let your home out, used it for commercial purposes or if its grounds total 5,000 square meters or more), business assets and certain shares. These shares are called “chargeable assets.”
When will I have to pay Capital Gains Tax during a divorce?
Usually, as long as you and your spouse are still married/in a civil partnership (and still living together in the eyes of the law), you can transfer assets freely between you without incurring Capital Gains Tax. This CGT relief is often referred to as transfers made on a ‘no gain, no loss’ basis. However, when you divorce or dissolve your civil partnership the ‘no gain, no loss’ treatment comes with a time limit. From 6th April 2023, the timeframe for this has been extended and is now applicable for up to three years after you cease to live together as partners. It is important to note that this is until the end of the third tax year after the tax year in which you separated. For example, if you and your spouse officially separated in September 2021, you would have until 5th April 2025 to transfer assets without incurring CGT. However, if the property transfer occurs as part of a formal divorce agreement, i.e in line with a Consent Order/ Court Order, then the time period for claiming the CGT relief is unlimited. This is a complicated area of law so if you are concerned about your potential CGT liability as part of your divorce settlement, please do call us on 020 8840 6640 or email us at solicitor@starckuberoi.co.uk, and one of our experienced divorce lawyers will be happy to assist you.
How long does a transfer of equity take?
A transfer of equity can be completed in as little as 2 to 4 weeks, but they can take longer if there is more that needs to be taken into consideration. If there is a mortgage to consider, for example, it will almost always take longer. While it’s understandable that obtaining a transfer of equity probably isn’t your top priority when separating, you should avoid leaving it to the last minute. Delays can arise unexpectedly and you could run out of time to complete the transfer if there are other things you also need to arrange as part of the divorce.
Should we just live together until the property is sold?
Not only is this likely to be quite emotionally challenging, but it might actually cause problems with your divorce. During the divorce process in England and Wales, the divorcing couple need to obtain a Conditional Order – a document previously called a Decree Nisi that confirms the couple can get divorced – and a Final Order, the document which officially ends the marriage, previously called a Decree Absolute. There must be at least 6 weeks and 1 day between the acquisition of these two documents. You may be thinking that you could simply hold off on applying for the Final Order until you’re ready to sell the house. But, if the couple have not applied for a Final Order within 12 months of the Conditional Order being granted, the application will be considered as being ‘overdue’. As such, you will have to give reasons for the delay and a judge will then consider your application. This may include you being asked to give a statement confirming that the parties have been living separately since their Conditional Order was granted. If you are still living together, this can raise issues in Court.
What happens when our home is sold?
If the property is jointly owned, Capital Gains Tax will usually not be payable on the share of the person who still lives in the property. However, for the person who left, it will depend on when the home was sold. If the home is sold within 9 months of the leaving party moving out, there usually won’t be any Capital Gains Tax payable on the leaving party’s share of the proceeds. But if the property is sold after this time, Capital Gains Tax may be payable, depending on whether this is in line with a formal divorce agreement.
What if the family home is in my sole name and I move out?
Whether Capital Gains Tax will be payable will depend on when the home is sold. If you move out and the home is sold within the aforementioned period, Capital Gains Tax won’t be payable. However, if it is sold outside of this time and another property is listed as your main residence, you may have to pay Capital Gains Tax when the property is sold, as it would no longer qualify for private residence relief. This is of course, unless the home is sold pursuant to a formal divorce agreement.
What happens if we get back together?
If there was never a Court Order or Deed of Separation in place, you would still be able to transfer assets between each other free of Capital Gains Tax until the last day of the third tax year after the tax year in which you believed the separation was likely to be permanent. Alternatively, if you temporarily separated with the possibility of getting back together (such as if you’d taken a break), you would still be able to transfer assets without needing to pay Capital Gains Tax because it was never acknowledged that you intended to separate permanently. However, if you believed the separation was going to be permanent and then reconciled and got back together, you would need to work out roughly when things changed and you decided you were no longer going to separate. Any transfers between you in the tax year in which you got back together would therefore be considered “no gain, no loss” even if you had transferred assets before getting back together. Regarding the family home, you may incur CGT if you jointly owned the family home but one of you moved out for a period of time. This is because the party who moved out did not live in the property, but did own a share in it. If the parties then move back into the family home together, you may not be liable for capital gains tax if the person who left did not live somewhere else for three years. There are a number of other factors which could impact your Capital Gains Tax liability and it can be difficult to predict what would happen if you’re not sure where your relationship is headed. For the clearest idea of what your tax liability could be, get in touch with our family and divoce solicitors today.
How Starck Uberoi Solicitors can help
We understand that separation is a confusing and difficult time, and we are here to help in any way we can. Our highly-qualified family law and conveyancing solicitors work closely together to combine their expertise and provide informed advice on all aspects of your matter. To book an appointment with us, please call 020 8840 6640 or email solicitor@starckuberoi.co.uk. Our offices are based in Ealing, Brentford, London Belgravia, Richmond and Canterbury, all within easy reach by public transport. Our partner, Raminder Uberoi, can also provide a Notary Public Service at any of our London offices.
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