When a married couple get divorced, Capital Gains Tax can be a very important issue to consider to ensure an equitable outcome and avoid any nasty surprises in the future.
The first thing I should say is that we are lawyers – not tax advisors – and so our role is not to give specific tax advice but to sign post when Capital Gains Tax may be an issue.
Capital Gains Tax is a tax on the profit you make when you dispose of an asset, either by sale or transfer. It is not possible for this article to cover all instances of when a Capital Gains Tax liability might arise but in the context of divorce, it is most likely to arise either on the disposal of property or shares in a limited company.
Capital Gains Tax is not usually payable on the disposal of one’s main home due to the exemption provided by the Principal Private Residence Relief. This means if your divorce settlement involves a sale or transfer of the family home then it is unlikely that Capital Gains Tax will arise. The Principle Private Residence Relief applies for the period of time of occupation of the property as your main home plus a further 18 months. As a result, if the family home is sold or transferred within 18 months of you moving out, it is unlikely that any taxable gain will arise.
Therefore, this means that careful consideration needs to be given to situations where a couple may not have formally dealt with a financial settlement for some time after separation. In such a situation there may be a Capital Gains Tax liability, depending on the increase in value of the family home.
Where a married couple own other properties in addition to the matrimonial home (for rental purposes for instance) Capital Gains Tax is much more likely to be a real consideration on divorce. Where properties have increased in value, Capital Gains Tax liability may well arise to either or both parties and, in order to achieve fairness between the parties, it should rightfully be taken into consideration in the overall settlement.
Calculating Capital Gains Tax is not a straight forward task and may require consideration of issues such as whether a property was ever occupied as the main home of either party, whether ‘letting relief’ will apply and whether money has been spent on improvement or maintenance works to the property. There can also be potential tax benefits of transferring certain assets between spouses in the tax year of separation.
The rate of tax payable will also depend on the parties’ respective incomes and (if any of the properties are either going to be sold or transferred to the other party) consideration may also need to be given as to whether there would be tax advantages of transferring the properties in the year of separation or transferring/selling the properties in separate tax years to maximise the annual tax free allowance.
As stated above, advice should always be sought from a professional tax expert.
The disposal of shares in a limited company can also necessitate Capital Gains Tax considerations. We are used to dealing with divorces where one or both of the parties to the marriage hold shares in a limited company or family business and often it is necessary for the shares in the company to be valued as the value of those shares will generally form part of the matrimonial pot for division between the parties. However, as is the case with properties, in order to do justice between the parties the true value of the shares taken into account should be the value of those shares minus any Capital Gains Tax liability which would be payable upon their disposal.
Calculating the Capital Gains Tax which might be payable upon the disposal of an interest in a company can be equally or more complicated than calculating the tax which might be payable on the disposal of other assets such as properties – for instance consideration may need to be given to ‘Entrepreneur’s Relief’.
In summary, when going through a divorce or separation, a married couple should always pay close attention to the potential Capital Gains Tax consequences of a proposed settlement. This includes formally putting a settlement in place rather than simply entering into an informal agreement with the other party to the marriage which may give rise to a nasty tax surprise in the future and result in an unintended (and possibly unfair) outcome.
If you are going through a divorce/separation and are concerned that the issues outlined above may apply to your circumstances please feel free to get in touch with our specialist team for a free, no obligation consultation on 01603 610911.