Whilst tax is unlikely to be at the top of your list of important issues if you decide to separate, the potential benefits which could arise from prudent tax planning can ensure that both parties do not have unexpected and unwanted tax charges. This is particularly relevant for Capital Gains Tax (“CGT”), which, in reality, is the most important tax consequence of a dissolution of a marriage. So divorce and tax should be considered together.
Transfers between spouses in the tax year of separation
CGT legislation stipulates that transfers of assets in a tax year between spouses living together in all or part of the tax year are regarded as being made on a ‘no gain/no loss’ basis.
This simply means that the recipient spouse takes on the original acquisition cost of the asset as their base cost for CGT and not the market value at the date of the divorce. As a couple you are treated as living together unless you have:
- Separated under a court order;
- Separated by a formal deed of separation, or
- Separated in such circumstances that the separation is likely to be permanent
As a married couple if you separate in a tax year, the no gain no loss treatment continues to apply for the duration of that tax year, even if you are not living together at the time of the transfer.
For example, if you were to separate in May 2022 and an asset were transferred between you and your ex-spose in January 2023, this would take place at ‘no gain/no loss’.
Such transfers clearly offer advantages where both parties are transferring assets as no CGT charge arises. However, circumstances often mean that this type of planning is difficult to engineer.
Transfers between spouses after the tax year of separation
Transfers subsequent to the tax year in which you cease living together you will not enjoy the ‘no gain/no loss’ treatment. Instead, spouses are treated as connected persons for CGT purposes until the date of the decree absolute which ends the marriage.
Transactions between connected persons is deemed to take place at market value, irrespective of the consideration actually changing hands.
The Matrimonial Home and Principal Private Residence Relief (“PPR”)
PPR alleviates all or part of the gain arising on the disposal of a property which has been used by an individual as their main home. Therefore, if a disposal of a house that has been fully occupied by the owner throughout the period of ownership occurs, PPR reduces the chargeable gain to zero.
Where a husband and wife are considered to be living together, it is only permissible to have one home qualifying for PPR between them. Possible issues can arise when one spouse moves out of the PPR qualifying property as part of divorce proceedings.
Thankfully, there is a very useful relief within the PPR legislation, which enables the departing spouse to claim for the property to continue to be treated as their main residence. In order for the relief to apply, the following three conditions must be met:
- The disposal is pursuant to:
- an agreement with the spouse or civil partner made in contemplation of the dissolution or annulment of the marriage or civil partnership;
- a separation order;
- that the separation is likely to be permanent, or
- by order of a court, a decree of divorce, nullity or dissolution is granted.
- The house continued to be the main residence of the departing individual’s spouse
- The individual claiming the relief has not elected for another property to be treated as their main residence
This relief is particularly beneficial if one of you have left the matrimonial home and are renting a new place or living with friends/family.
Conversely, in instances where the departing spouse has purchased a new property, they will not obtain PPR on this property for the period that the matrimonial home is deemed to be their main home. A comparative calculation should be performed to ascertain whether continuing to treat the matrimonial home as the main residence is beneficial or not.
In cases where the home is to be sold by the spouses to a third party as part of divorce proceedings, it is advisable that this is done within 9 months of one spouse’s moving out. This is because the final 9 months of ownership is always treated as deemed occupation and therefore qualifies for PPR.
Divorce can be complicated and tax consequences of divorce are never simple so if you believe this to be of relevance to you, please get in touch with us. We are happy to assist with possible tax mitigation strategies. Visit us at https://www.myersclark.co.uk/tax for more information