In Divorce Law most divorces will result in a financial settlement between the couple dividing the assets. But what many may not be aware of is that where this involves the transfer or disposal of capital assets held by the couple, there may be capital gains tax implications that need to be considered.
In the case of a financial settlement between the couple involving the transfer of all or part of a capital asset, there will usually be a ‘disposal’ meaning that they will be treated as having sold or gifted the asset at market value for capital gains tax purposes. The actual capital gains tax position depends on the asset being transferred and the timing of this.
Where assets are transferred between the couple after the end of the tax year in which they are separated but before they are divorced (i.e. receive the decree absolute), the spouse transferring the asset will be treated as disposing of it at market value. This is because the couples are regarded as connected persons until the decree absolute is issued. This may therefore result in a capital gains tax liability.
For many couples, the largest asset they own that will need to be dealt with under any financial settlement is generally their matrimonial home. Where this has been the couple’s main residence throughout ownership, any gain arising on transfer/disposal will be exempt from capital gains tax. However, it is likely that there will be a period after separation and before transfer/disposal where the property is not the main residence of one member of the couple, and this is where divorcing couples really need to be aware of the implications.
Where a property has been the couple’s main residence at some point during ownership, any gain arising in the last 36 months of ownership is covered by the ‘principal private residence exemption’ for capital gains tax purposes. Therefore providing any disposal takes place within three years following the departure of either spouse/civil partner, and that the property was their main residence throughout the period of ownership up to the separation, the full exemption should be available meaning no capital gains tax should arise on the property. If however the property has not been the couple’s main residence throughout the whole period of ownership, you will need to find a solicitor for advice to determine the relief available.