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Capital Gains Tax is sometimes payable on the profit you make when you sell or transfer an asset. On divorce, this is most likely to be an issue regarding the disposal of:
- Property, such as the family home or second home
- Valuable assets such as jewellery, artwork etc.
- Shares in a limited company.
Each individual has an annual Capital Gains Tax exemption, meaning you can make a certain amount of gains before you pay any tax (the threshold can change from year to year so it is wise to check this year’s allowance).
Above this, if you remain within the basic Income Tax band when any gain is added to your taxable income, you will pay tax of 10% on your gains, or 18% on residential property.
If you are a higher or additional-rate taxpayer, or your gain takes you into a higher tax bracket when added to your other taxable income, you will pay tax of 20% on your gain, or 28% on residential property.
The amount of tax you could pay can be significant, and so it’s important that you do what you can to mitigate any Capital Gains Tax liability.
The disposal of your main residence is not usually subject to Capital Gains Tax. If your divorce settlement involves the sale or transfer of your home, Principal Private Residence Relief will typically apply.
From April 2020, Principal Private Residence Relief applies for the entire time you own the property as your main residence, plus a further nine months after separation (previously it was 18 months).
This nine-month limit means that it’s important you deal with a financial settlement promptly, otherwise a tax liability could be due if your home has increased in value and is sold after more than nine months. The tax liability could be up to 28% of the profit.
Another way to ensure no Capital Gains Tax is payable on divorce is to agree the transfer of any assets in the tax year immediately following separation.
Spouses and civil partners can transfer assets between each other with no tax liability under the ‘no gain/no loss’ principle. Even if you have separated, this principle remains until the tax year following separation.
So, if you separate on 1 April, you will only have a few days before the end of the tax year on April 5 to divide your assets to avoid a potential Capital Gains Tax liability.
If you separated on 1 May, you would have up to 5 April the following year to make the most of the ‘no gain/no loss’ principle. This gives you more time to dispose of difficult to sell assets such as property.
It is possible that you or your former spouse hold shares in a family business or a limited company. When you divorce, the shares in the company may need to be valued as they could well form part of your financial settlement.
If any shares are sold or transferred as part of your divorce settlement there can also be a Capital Gains Tax liability. Again, the ‘no gain/no loss’ principle applies as long as the shares are disposed of within the tax year of separation.
If you sell or transfer assets after the end of the tax year, or after your relationship has legally ended, there may be Capital Gains Tax to pay.
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The information on this website is to be considered a guide and is therefore not legal advice. You use this information with the understanding that Wiselaw does not accept liability for any direct or indirect losses as a result of anyone relying on or acting upon the information on this website. Whilst we endeavour to provide accurate information, Wiselaw does not accept liability for any errors or omissions on this website.