Capital gains tax implications when couples divorce

When couples divorce, they know they need to sort out a financial settlement and selling the family property may form part of that.
This could have tax implications for couples, particularly in light of recent changes to capital gains tax (CGT) relating to the sale or transfer of property or other assets such as company shares.

When capital gains tax doesn’t apply following the sale of the family home

The sale of the family home is generally covered by a relief known as Principal Private Residence Relief (PPR) so that you pay no tax on any gain. However, if you sell more than 9 months after you moved out of the property, CGT applies. This is half the leeway granted before April 2020.

This situation arises quite commonly, when one spouse moves out and the couple spend a while letting the dust settle, or negotiating terms, or simply finding a buyer, before the house can be sold.

If you transfer the property from one spouse to the other, there is no trigger for CGT if the transfer takes place within the year of separation, but after that year CGT can potentially apply, so be aware of the 9-month rule and the application of this tax to other assets such as holiday homes and rental properties.

Payment deadline for CGT

CGT is now paid 30 days from the date of the relevant sale or transfer, a very much shorter timescale than before.

People need to factor in this liability to any settlements, not just to ensure the figures are fair, but also to be certain the funds are available when the tax has to be paid.

Business Asset Disposal Relief (BADR) – formerly Entrepreneurs’ Relief

The introduction of BADR has substantially reduced the lifetime limit for what was Entrepreneurs’ Relief from £10m to £1m, allowing disposals up to that limit to be taxed at the favourable rate of 10%. This is relevant in many divorce situations where there is, for example, a family company whose shares are being transferred from one party to the other after the year of separation or if the shares are being sold.

Stamp Duty Land Tax

SDLT, more commonly known as Stamp Duty, doesn’t generally apply to a transfer made pursuant to a divorce court order, but it is worth bearing in mind that if one spouse moves out of the family home and buys another whilst still owning a share in that home, or indeed in any other property, Stamp Duty at a much higher rate (an additional 3% of the value of the property) may well apply, and specialist tax advice should be sought.

Inheritance Act Tax (IHT)

IHT is not usually a problem in a divorce situation, but again care must be taken if an asset is being transferred into a trust or if a party is domiciled outside the UK.