Separation and divorce:
Capital gains tax

Capital gains tax arises on chargeable gains of individuals. Chargeable gains can only arise on the disposal (or deemed disposal) of assets. A chargeable gain is calculated as the proceeds less the cost and other relevant expenses, subject to a complex set of rules. Capital gains tax is payable on chargeable gains after allowing for any reliefs or allowances.

Jargon buster: Chargeable gains:

The basic calculation of a chargeable gain is as follows:
Sale proceeds or market value	�12,000
Less: Selling expenses (e.g. legal fees)	� 1,000
Less: Cost	� 3,000
	-----------
Chargeable gain	� 8,000
This is a very broad outline - issues such as indexation, taper relief, losses and the annual personal exemption would need to be considered in a full calculation.

Not all assets will give rise to a chargeable gain on disposal. The nature of the asset, or the nature of the transaction, may exclude it from a capital gains tax charge. One such class of �excluded� transaction is a transfer between a husband and wife living together. Virtually all transfers of an asset between spouses living together are treated as giving rise to a chargeable gain of nil (typically referred to as a no gain / no loss transfer) whatever the cost or market value of the assets.

A married couple are treated as living together unless:

they are separated under an order of a Court, or

they are separated by a formal Deed of Separation executed under seal (or witnessed if in Scotland), or

they are separated in such circumstances that the separation is likely to be permanent.

Marriage must have broken down for a couple to be regarded as not living together. If a married couple are, perhaps for reasons of work, living apart but the marriage has not broken down, they are still treated as them living together for capital gains tax purposes.

Once a couple are separated any transfers of assets between them could result in capital gains tax. It is important to take advice on the likely structure of any divorce settlement to try and mitigate capital gains tax.

Although not a priority for most separating couples, asset transfers can still benefit from the no gain/no loss provisions, for a time following separation, because asset transfers are treated as such throughout the tax year of separation.

Following separation, a couple remain connected persons (see Jargon buster) for the purposes of capital gains tax until the divorce is final (the decree absolute).

Jargon buster: Connected persons

For capital gains tax purposes you are connected with your spouse, any relative (sibling, ancestor or lineal descendant) of you or your spouse and with the spouse of any such relative. There are also rules in respect of trustees, business partners and companies and the circumstances in which you may be connected to then.

Any transaction with a person (or body) you are connected with is treated for tax purposes as being made at market value even if no money changes hands.

For example, if you are married and give your spouse shares worth �15,000 there is no capital gain as transfers between spouses are treated as made at a value giving rise to no gain / no loss.

If, however, you are separated and (following the end of the tax year)give your soon-to-be ex spouse shares worth �15,000 you are treated as though you had sold the shares for �15,000 (and your spouse is treated as though he or she had bought them for �15,000). This could result in a chargeable gain and a capital gains tax liability.

Any transfers of assets between spouses from the start of the next tax year following their separation to are therefore deemed to take place at market value. This could result in an otherwise unexpected capital gains tax liability on the transaction.

Where a husband and wife are living together:

Where a husband and wife are permanently separated:

Transfers between them after the end of the tax year in which separation occurs take place at market value

They can each have a separate main residence that qualifies for PPR exemption (see Jargon buster below)

If either one has more than one residence they can each make separate elections as to which is their only or main residence

Even if a property is in the sole name of one spouse, the other spouse may have an equitable interest in it. Any gain on a sale is split in proportion to the equitable interests and each spouse considered separately for PPR on his or her share.

Jargon buster: Principal private residence (PPR) exemption

The home you live in will generally be exempt from capital gains tax when you sell or transfer it, provided you have lived there throughout your ownership and it is your only or main residence.

You can only have one home as your only or main residence at any given time. If there are two properties which could be regarded as such you can elect which it is to be within 2 years of the acquisition of the second property. If you do not make an election, which property is your main residence will be a question of fact.

The last 3 years of ownership of a property is always treated as being your only or main residence even if you do not live there provided it has been your main residence at some time.

The detailed rules are complex and a large capital gain can result if a property fails to qualify for the exemption. If this applies to you, why not contact us to see if we can help?

A further point in connection with capital gains tax is taper relief (see Jargon buster). Where an asset is transferred between spouses under the no gain / no loss provisions, their combined period of ownership is taken into account for taper relief on a subsequent disposal to third parties. If, however the transfer occurs when the couple are separated, the no gain / no loss provisions do not apply and the period of ownership for taper relief on a subsequent disposal to third parties is only in relation to the spouse owning the asset at the time. As this period will be shorter than the period of joint ownership there may be less taper relief and a higher taxable capital gain. There is also the possibility that an asset qualifying for the higher rate of taper relief as a business asset when held by one spouse will not qualify when held by the other. The definitions of what constitutes a business asset are complex and one spouse meeting the criteria is no guarantee that the other spouse will also meet them.

Jargon buster: Taper relief

The chargeable gain is reduced by a fixed percentage depending on how many years you have owned the asset. The percentage is higher for business assets than it is for non-business assets.