Capital gains tax on separation

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 an immediate CGT liability provided you are not separated from them. The transfer is said to occur at ‘no gain no loss’ and we explain more about how this works below. 

You are separated from your spouse or civil partner for CGT purposes if you are separated:

• under a court order; or
• by a formal deed of separation; or
• in such circumstances that the separation is likely to be permanent.

If you separated from your spouse or civil partner in circumstances likely to be permanent before the date of the relevant court order or formal deed of separation (as will generally be the case), then the date of separation for CGT purposes will be the earlier date.

If you are not married or in a civil partnership with your partner then you cannot transfer assets between you on a ‘no gain no loss’ basis. 

What is ‘no gain no loss’ treatment?

When you transfer an asset to someone else, you are disposing of it (that is, you no longer own the asset). This means you need to calculate whether you have made a capital gain or loss on that disposal. You do this by deducting the CGT ‘base cost’ and any transactional costs from the ‘proceeds’ from the disposal.

In a ‘no gain no loss’ transaction, your ‘proceeds’ are deemed to be such that there is neither a gain nor a loss. This is regardless of the amount actually paid or received in return (if anything).

Example: Ted and Mary

Ted and Mary are married and not separated. Ted owns a rental property worth £500,000 and decides to give it to Mary. Ted bought the property in 2008 for £200,000. At the time he incurred legal fees of £1,500 and had to pay Stamp Duty Land Tax (SDLT) of £2,000. Ted has not made any capital improvements to the property. Ted’s total deductable costs for CGT purposes are therefore £203,500.  This figure becomes Mary’s ‘base cost’ for a future disposal by her. The ‘no gain no loss’ transfer will look as follows:

It is not possible to factor in the annual exempt amount or any capital losses that the disposing spouse or civil partner might have available – the gain is calculated as nil before these elements are factored into the calculation.

‘No gain no loss’ treatment is essentially a deferral of CGT until the asset is eventually disposed. If Mary were to sell the property a few months after sale (at a time when the property is worth, say, £525,000), she would pay CGT on the entire gain arising since it was acquired by Ted. Mary’s gain would therefore be £525,000 less her base cost on the gift from Ted, which is £203,500, resulting in a gain of £231,500 (with further deductions for any legal or agent’s fees incurred).

‘No gain no loss’ treatment can mean that more CGT may be payable overall. When the asset is eventually sold or disposed outside of the marriage/civil partnership, the entire gain will be assessed in the tax year of disposal and only one CGT annual exempt amount will be available to set against this (assuming the asset is held by only one person when sold).

Comparing this to the position where ‘no gain no loss’ treatment does not apply on a transfer – in this case the capital gain to the point of transfer is taxed, with an annual exempt amount potentially available depending on that person’s other capital gains in the year. Any gain from the point of transfer to the date of sale is then treated as an entirely separate gain, which may benefit from another annual exempt amount in the year of sale.

It is also worth bearing in mind that ‘no gain no loss’ treatment may mean that CGT is avoided entirely. An example where this happens would be if the asset is never sold in the lifetime of the person receiving it. The asset would then form part of that person’s estate for inheritance tax purposes.

A final point to note is that where ‘no gain no loss’ treatment applies, it is automatic – it is not possible to ‘opt out’ in order to make use of the annual exempt amount, capital losses or lower tax rates that might be paid by the disposing spouse or civil partner.

After I separate from my spouse/civil partner, can I still transfer assets between under the ‘no gain no loss’ rules?

At the time of writing (in February 2023), you can get ‘no gain no loss’ treatment up to the end of the tax year in which you separate from your spouse or civil partner. For example, if you separated in November 2022, assets transferred between you up to 5 April 2023 would not trigger a CGT charge. 

For transfers on or after 6 April 2023, the rules are changing so that ‘no gain no loss’ treatment can potentially apply for a longer period. We comment on these proposed rules here. We will update our guidance once the new rules have been finalised.

In general terms, if transfer of assets between spouses/civil partners do not qualify for ‘no gain no loss’ treatment, they 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 home and my spouse/civil partner has moved out. What happens when the home is sold?

Your share of the proceeds will remain free of CGT assuming it has been your main home throughout the entire period of ownership. Any profit on your spouse/civil partner’s share may be liable to CGT. If the property is sold within 9 months 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 may 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 or civil partner makes the transfer more than 9 months after having left the property, because the leaving spouse or civil partner would be entitled to private residence relief for the final 9 months 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/civil partners 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.

In addition, the government are intending to extend this relief in cases where one party moves out following separation and there is an agreement for that person to receive a percentage of the proceeds from sale. This would allow the person who moved out to have any private residence relief on their share of the gain unaffected by the fact they did not live in the property between their moving out and the property being sold. This page will be updated once these new rules have been finalised.

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 home 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 on a ‘no gain no loss’ basis

Where there has been no court order or deed of separation, the ability to transfer assets between the two of you on a 'no gain no loss' basis would continue until at least the end of the tax year in which the separation was ‘likely to be permanent’. Transfers on or after 6 April 2023 may benefit from ‘no gain no loss’ treatment for a longer period under the new rules discussed above.

The above would apply 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, 'no gain no loss' treatment would continue to apply for any transfers of assets throughout the period of temporary 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.

Main residence

For main residence relief purposes, you cannot have a different residence or main residence from your spouse or civil partner, so long as you are not separated for CGT purposes. As a result, you can only have one main residence between you.

Therefore, provided you remain unseparated for CGT purposes, a temporary absence from the family home will not affect the private residence relief available for the spouse or civil partner who is temporarily absent from that home.

On the other hand, if you do become separated for CGT purposes then you are not deemed to occupy the same main residence as your spouse or civil partner simply because of your legal relationship with them. (Alternatively, you may never have been married or in a civil partnership with your ex-partner.)

In this situation, if you own a property jointly but you have separated and you live apart (for example, you live with a friend or in rented accommodation), then your absence from the jointly-owned property may mean it is not a period of actual occupation for you, depending on the facts and circumstances. Even if the property continues to be occupied as a residence, without a nomination it may not be your main residence. In either case, this would mean that 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 as a residence provided it does not exceed three years. A main residence nomination may be required to secure private residence relief for the period of absence from the marital home.