22 January 2015, by Taylor King Family Law Solicitors
When a couple are married and have not separated, if they wish to transfer assets between each other they can do so without any capital gains tax implications. However, this tax benefit disappears at the end of the tax year following permanent separation. If the divorce is finalised in the same tax year as separation the tax benefit will end on the date of the divorce rather than the end of the tax year.
From a tax point of view the date of separation should ideally be 6th April thereby giving the divorcing couple an entire year to agree the transfer of assets between each other. However, the reality for most people is that by the time they start thinking about tax planning on divorce the capital gains tax exemption will be gone.
The Family Home
The family home is one exception to the above. It will qualify as being capital gains tax free on transfer if it has been the couple’s main residence throughout the entire period of ownership under the principal private residence relief. Principal private residence relief can be claimed if all of the following conditions are met:
- One spouse or civil partner stops living in the family home because they have separated;
- The partner that moved out has not formally elected with HMRC for another house to be their main home;
- The partner that moved out later gives their interest in the family home to resident spouse/civil partner;
- The other partner keeps living in the family home and their main house; and
- The transfer is made as part of the divorce settlement.
If the parties agree that the former matrimonial home is to be sold after separation then the non resident spouse is only entitled to claim the capital gains tax relief for a period of three years from the date he/she moved out of the property. Therefore, departing spouses should ensure that the former matrimonial home is sold within three years of their leaving the property.
If, as part of a divorce settlement, the court orders that the former matrimonial home is not to be sold until the youngest child ceases full time education then the non resident spouse would still be entitled to the principal private residence relief when the property is sold. However, he/she would not be able to claim that relief on any other property in which they resided prior to the sale of the former matrimonial home.
Businesses can also be transferred without a capital gains tax charge, i.e. sole trader businesses, interests in partnerships that are trading or shares in unquoted trading companies. However, the business must not be a property rental/investment business. There are detailed requirements and procedure that must be met so if this applies to you, please consult a tax advisor.
Special income tax rules also apply to married couples in the case of income from jointly held property. Provided that at least one spouse is entitled to the income, the spouses are taxed under this rule as if they were sharing the income on a 50/50 basis. This rule ceases to apply on the date the married couple separate.
For inheritance tax purposes, transfers/gifts between spouses are exempt transfers up until the marriage or civil partnership has been dissolved. Transfers made on divorce, or for the maintenance of the family are also exempt from inheritance tax.