What impact Will Capital Gains Tax Have on my Divorce?
How might capital gains tax impact my divorce?
In divorce proceedings, the court will generally look at the collective assets of the parties, regardless of whose name they are in. These collective assets will then be divided according to the parties’ needs or fair sharing. The main exception to this is when assets are “non-matrimonial”, meaning they come from outside the marriage. However, non-matrimonial assets may still be considered part of the joint pot if required to meet the parties’ needs. This focus on the parties’ collective assets means that there is often a transfer of capital between spouses or sale of assets and the proceeds distributed between the spouses. However, a transfer or sale may attract capital gains tax.
How do I find out if capital gains tax will impact my divorce?
It is important to seek professional financial advice on capital gains tax. A lawyer will be able to advise on how capital gains tax is approached during proceedings and signpost to an appropriate accountant. Once an accountant has advised on the capital gains tax, both parties and the court can better consider the financial impact of their options for financial settlement. A lawyer can then advise on financial settlement based on that capital gains tax liability.
Are there exceptions to capital gains tax?
There are a number of reasons why capital gains tax may not apply, including:
- the amount of money which would be due being less than £12,300;
- it is possible to apply for an exception if property will be transferred between spouses;
- it is possible to apply for ‘principle private residence’ relief.
Most divorce cases involve a home which has been the spouses’ principle private residence. However, once the relationship ends, most spouses will live separately until the financial remedy proceedings are concluded. This can take over a year, and therefore principle private residence relief may no longer apply. This is because the family home is no longer the principle private residence of both parties. There are detailed rules on how this operates in practice.
Is capital gains tax changing?
The detailed rules on capital gains tax applies on divorce will change for disposals made on or after 6 April 2023. The government has confirmed that that the following changes will be introduced in the Finance Bill 2022-2023:
- separating spouses or civil partners be given up to three years after the year they cease to live together in which to make no gain or no loss transfers
- no gain or no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement
- a spouse or civil partner who retains an interest in the former matrimonial home be given an option to claim Private Residence Relief (PRR) when it is sold
- individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold, be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the home to their ex-spouse or civil partner
Here to Help
These changes are likely to save money in many cases. Specialist legal and financial advice is crucial to working out how they might apply in your case. If you need advice on any family matter, please get in touch with Kerrie Hall, Senior Solicitor specialising in Family Law.
Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.