Capital gains tax on separation
Other tax issues
The breakdown of a marriage or civil partnership can be a stressful time for all concerned. Below, we cover some key points to consider from a capital gains tax perspective. You should also read our guidance on personal allowances.
What does it mean to be separated from my spouse/civil partner for CGT purposes?
For CGT purposes, you are able to transfer assets between you and your spouse or civil partner without incurring any CGT liability provided you live with them at some point in the tax year. The transfer is said to occur at ‘no gain, no loss’ because the recipient inherits the base cost of the asset being transferred.
Spouses and civil partners are in fact deemed to be living together for this purpose – even if they are not physically living in the same property – unless they are separated:
- under a court order;
- by a formal deed of separation; or
- in such circumstances that the separation is likely to be permanent.
If you are not married or in a civil partnership with your partner then you cannot transfer assets between you free of CGT in the same way, even if you live together.
After I separate from my spouse/civil partner, can I still transfer assets between us free of CGT?
Currently, you can only do this up to the end of the tax year in which you separate – so if you separate in November 2022, you can only transfer assets between you free of CGT up to 5 April 2023. However, the government have agreed to extend this period, following recommendations made by the Low Incomes Tax Reform Group and others. We expect the government to consult on the detail of changing this rule in 2022.
In general terms, the transfer of assets between spouses after the tax year of separation will be treated as gifts and therefore liable to CGT. However private residence relief may be available if the asset being transferred is the family home (see below).
I have stayed in the jointly owned family house and my spouse/civil partner has moved out. What happens when the house is sold?
As the house is jointly owned, your share of the proceeds will remain free of CGT as it is your main home. Any profit on your spouse/civil partner’s share may be liable to CGT. If the property is sold within 9 months (18 months for disposals prior to 6 April 2020) of them moving out, then the exemption from CGT for their main residence will apply to the period of absence; after that a proportion of their gain will become liable to tax (but see below).
Your spouse/civil partner will still have their annual exempt amount to use against this gain, if they have not used it against other gains, and will be able to use any capital losses they have.
There is a special relief available where, in connection with a permanent separation or divorce or dissolution of civil partnership, the leaving spouse or civil partner legally transfers (that is, disposes) of his or her share of the jointly-owned property to the remaining spouse or civil partner (such a transfer could be a disposal for CGT purposes).
The relief is only relevant if the leaving spouse makes the transfer more than 9 months (or 18 months for disposals prior to 6 April 2020) after having left the property, because the leaving spouse would be entitled to private residence relief for the final 9 months (or 18 months for disposals prior to 6 April 2020) of ownership of their share in any case. The conditions are:
- the property is transferred to the remaining spouse or civil partner as part of a financial settlement (for example, an agreement between the spouses or an order of the court); and
- no other property becomes a main residence, for the purposes of this relief, of the leaving spouse or civil partner; and
- the property in question remains the main residence of the remaining spouse or civil partner.
If these conditions are met, the leaving spouse or civil partner will still obtain private residence relief from CGT for the period from his or her moving out to the point of transfer.
For more information see HMRC’s helpsheet 281.
I own the family home but my spouse/civil partner and I have separated and I now have my own flat. What happens when the family house is sold?
You should consider the example Harold to see what happens in this situation.
What if we get back together after separating?
You or your spouse/civil partner may have lived separately for a period while it was felt that either your relationship had ended or otherwise its future was uncertain.
Transfer of assets free of CGT
Where there has been no court order or deed of separation, the ability to transfer assets between the two of you free of CGT would continue until the end of the tax year in which the separation was ‘likely to be permanent’. This is irrespective of whether or not you are physically living separately or apart.
Therefore, if you had separated in circumstances not likely to be permanent (in order words, you took a temporary break) and you then got back together, then the ability to transfer assets between you free of CGT would continue throughout the period of separation.
If you had considered the separation was likely to be permanent but you nevertheless got back together at some later point, you would need to determine when the circumstances changed such that permanent separation was no longer likely. Transfers between you in the tax year in which the reconciliation occurs would be at ‘no gain no loss’, even if the transfer happened before the change in circumstances.
For main residence purposes, you can only have one main residence between you and your spouse or civil partner. This is the case until you are separated either by court order or deed of separation, or otherwise in circumstances likely to be permanent.
However, you are not deemed to occupy the same main residence as your spouse or civil partner simply by virtue of your relationship with them. Therefore if you own a property jointly and you live apart for a period (for example, one person lives with a friend or in rented accommodation), then that will not be a period of actual occupation of the marital home and so there is a potential exposure to capital gains tax in respect of your share of the gain attributable to this period.
If you later re-occupy the property (for example, because you have got back together) then you may be able to treat the period of absence as a period of ‘deemed occupation’ provided it does not exceed three years.