What you need to know about divorce and capital gains tax

 

Going through divorce is a difficult time for anyone and tax may not be top of your agenda, however, it may be worth getting taxation advice to avoid any unnecessary liabilities.

The transfer of assets between spouses or civil partners is on a ‘no gain/no loss’ basis.  Any amounts actually paid for are ignored.  If the person later disposes of the asset, he or she will have a base cost equal to what the original holder of the asset had paid for it.

The ‘no gain/no loss’ treatment continues to apply to transfers between spouses or civil partners throughout the whole of the tax year in which separation takes place, even though the spouses or civil partners may not be ‘living together’ at the time of transfer.  The common misconception is that this treatment continues until the date of divorce.

If a divorce, or dissolution of a civil partnership, takes place in the same tax year as separation, the ‘no gain/no loss’ treatment continues to apply to transfers of assets made after that divorce or dissolution, up until the end of the tax year.

If transfers occur after the end of the tax year in which you stop living together the rules to decide the date of disposal and the amount of consideration on disposal are as follows:

(a) Date of disposal

For transfers made as part of a divorce agreement, the date of disposal for capital gains tax purposes is the date of the agreement.

If transfers take place following a court order, the date of disposal for capital gains tax purposes is the date of the court order, unless that precedes the date of the decree absolute, in which case the date of the decree absolute is the effective date.

(b) Amount of consideration

Transactions between a husband and wife (or civil partners) after the tax year of separation, cannot take place at ‘no gain/no loss’.  They are deemed to still be ‘connected’ and, therefore, the market value of the asset is used.  This could potentially mean a capital gains tax arises.

Once a decree absolute is granted, you are no longer deemed to be ‘connected’ persons and the consideration will be the amount placed on the assets agreed by both parties.

The rules surrounding capital gains tax on separation and divorce are complex, however, they are worth considering as the issue is complex enough without running into problems with the taxman!

If you need assistance to help you understand these rules, please do not hesitate to contact our tax team.

By, Fiona Ferrol, Manager

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