Taxation of Properties – Separation & Divorce

Although tax is not the only consideration in a divorce, knowing the rules and understanding the tax implications can ensure that separation and divorce is managed in the most tax-efficient way possible.

All taxes need to be considered carefully, namely Income Tax, Capital Gains Tax and Inheritance Tax. Although there would be no immediate Income Tax or Inheritance Tax payable on any transfers, Capital Gains Tax can crystalise on any transfers occurring after permanent separation.

Capital Gains Tax – The Basics

Capital Gains Tax on residential properties is charged at 18% and 28% on gains over and above the annual exemption. Gains arise not only on outright sales but also, under certain circumstances on gifts.

Gains giving rise to a tax charge must now be reported to HM Revenue and Customs, with the tax being paid, within 30 days of disposal.

Capital Gains Tax – Married Couples

If spouses or civil partners are living together, any transfer of an asset between them is treated as giving rise to neither a gain nor a loss to the person transferring it. Any amount actually paid is ignored. The transfer therefore gives rise to no immediate charge.

Capital Gains Tax – Year of Separation

If spouses or civil partners were living together at some time in a tax year, they can transfer assets between them at any time in that tax year at no gain/no loss. There is no requirement that they should be living together at the time of transfer.

Capital Gains Tax – After the Separation

Spouses and civil partners are treated as connected parties for tax purposes prior to Decree Absolute. After the year of separation, transfers between the separated couple would be deemed to occur at market value and would no longer benefit from the exemption available to spouses and civil partners living together. This would give rise to a potential tax charge on the spouse giving away an interest in a property.

Once Decree Absolute is passed, the former spouses or civil partners are no longer deemed to be connected. Any transfer then is subject to Capital Gains Tax based on the actual consideration paid, however, should this not be deemed to be an arms-length transaction, the market value rules would once again prevail.

Capital Gains Tax – The Family Home

Where the family home is to be sold and the proceeds divided between the spouses under the divorce settlement,  any gain on the sale will be exempt from Capital Gains Tax as long as the sale takes place within 9 months of the departing spouse having left the family home.

Thereafter, a gain may begin to accrue on the departing spouse.

Income Tax

The transfer of any assets under a divorce settlement are not subject to income tax. However, if an individual is allocated income-generating assets, they will be subject to tax on any income which subsequently arises on the assets they receive.

Inheritance Tax

Transfers between spouses or civil partners are generally exempt from Inheritance Tax and this remains the case throughout a period of separation and until Decree Absolute is pronounced. Any transfers between former spouses or civil partners after Decree Absolute are treated as Potentially Exempt Transfers and, under current legislation, could become chargeable should the transferor not survive 7 years from the date of transfer.

To discuss any of the above points in further detail, please contact us on 01522 531 341.

*Details correct as at October 2020