Article in Tyne Valley Express

Capital Gains Tax (CGT) is not usually uppermost in people’s minds when their relationship breaks down. However, for couples who are in business together, own properties other than the one in which they live, or have other assets such as share portfolios, it needs to be a consideration. It is particularly relevant to the growing numbers of couples who have been married for many years (increasingly known as “Grey
Divorces”) and a topic I am frequently asked about.

For clarification, CGT is a tax charged on the capital gain (profit) made on the disposal of any asset. It is payable by the person making the disposal. The gain/profit (the difference between the price you paid for the asset and the price you sold it for) is considered taxable income.

For married couples

Each individual in a marriage has their own CGT annual exemption and their CGT is worked out separately. However, when either party in a couple gifts assets to the other, CGT is not payable until the recipient disposes of the asset.

This can be a useful tool for reducing CGT. For example Mr A has two buy-to-let properties which he wants to dispose of this year. If he transferred one of them to his wife before he sold it, her capital gains tax annual exemption would be available as well as his own.

On separation

When a couple separate, the position for CGT remains the same during the year of their separation. So even if they separate in July, they can still pass assets to each other until 6 April the year following the separation. CGT is only payable when the asset is eventually disposed of.

What counts as separation?

HMRC have defined separation for these purposes as when:

You are separated under a court order

You are separated by a formal Deed of Separation executed under seal

You are separated in such circumstances that the separation is likely to be permanent .(It is not necessary to be living in separate houses for this purposes.)

In each case the marriage must have broken down

The position between separation and divorce

In the tax year of separation, a couple can pass assets to each other without triggering a Capital Gain. However, in the years following separation, this is not possible. Also, whilst a couple remain married, they are “connected persons” for CGT. Therefore any asset that they pass between them is at market value. Any assets they pass between themselves after the year of separation and up to the date of their divorce may trigger a capital gain.

Gift Relief is available on some assets,eg business assets. This means that these assets can be transferred and any gain from the asset can be held over until the recipient eventually sells the asset. This works a bit like the position for husband and wife up until the year of separation. It is not available to other assets, eg share portfolios and buy-to-let properties.

If you have questions regarding CGT and its implications for you following a separation, do seek professional advice and keep HMRC up to date with any changes which may affect your Tax liability.