Capital Gains Tax Savings on Divorce

Posted by Stephanie Buckeridge

21-12-2017

In the majority of cases sadly the transfer of the family or the sale of the home is very common. However how that sale is structured and the timing of a transfer or sale can be essential to the outcome of a settlement. The issue of Capital Gains Tax is frequently forgotten until its impact bites and tax savings are no longer possible.

Married couples living together do not attract Capital Gains Tax which includes transfers of property however this changes position when a married couple separates. It is important to establish the date of separation for tax purposes.

It can be quite tricky to establish the date of separation as each spouse may have a different view as to the point at which there relationship had broken down to such an extent that the separation was likely to be permanent. The date of permanent separation is critical for the purposes of a Capital Gains Tax calculation.

In the tax year of separation, assets can be transferred between spouses as if they remain living together. This means for example if a married couple separate permanently at the beginning of May 2018 they will have until 5th April 2019 to complete a transfer to take advantage of the exemption.

It is usually the case that if a transfer of assets occurs between spouses after the tax year of separation they will be treated as gifts and therefore be liable to Capital Gains Tax. The family home however is treated slightly differently and has the benefit of Principal Private Residence Relief.

This relief enables the absent spouse, for tax purposes only, to be deemed as occupying the family home for a period of up to 18 months following the date of separation. This relief applies irrespective of the date that they moved out. This would mean a transfer of sale which takes place during that 18 month period would not incur a Capital Gains Tax liability.

If the transfer of the family home takes place more than 18 months after the date of permanent separation the period of deemed occupation of the family home for tax purposes can on occasions be extended indefinitely. In order to qualify for this relief, all of the following circumstances must apply:

  1. the transfer of the family home must be made as a result of an agreement between the spouses or an order of the court;
  2. from the date that the absent spouse moved out, the family home has continuously been the only or main residence of the remaining spouse;
  1. the absent spouse has not elected another property as their main residence for tax purposes, which may be advantageous for them to do if they purchase a new residence.

In circumstances where the deemed occupation of the departing spouse, described above, is not permitted, Principal Private Residence Relief will still apply although the level of relief will reduce over time. The tapering will start from the expiration of the 18 month period following separation.

Tax advice

Capital Gains Tax issues can be complex and it is important for separating couples to consider the same within the scope of the agreement and outcome they are seeking to achieve. Discussing these issues with their lawyer and an accountant at an early stage could result in significant tax savings.


Stephanie Buckeridge

Associate
Family Law

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