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Navigating the complexities that come with Capital Gains Tax (CGT) and separated couples will involve careful consideration of various factors. In this blog, we delve into how CGT works, the implications of the tax for those going through a separation, and shed light on some key aspects that can influence a person’s financial situation in the wake of what is sure to be a very emotionally-charged period. 

Getting an understanding as to how CGT applies to an asset transfer in the wake of a breakup can empower individuals to make much more informed decisions. So, whether you’re contemplating the division of assets or are looking at ways to minimise tax liabilities post-separation, this blog aims to provide you with some valuable insight.  

As we unravel the intricacies of Capital Gains Tax for separated couples, our goal is to equip you with knowledge that could help to foster greater financial prudence as well as a  smoother transition through life. Read on to find out more.

How Does CGT Work?

Capital Gains Tax works by taxing the profits a person makes when they dispose of an asset that has increased in value since they first purchased it. If you’re wondering ‘how does CGT work?’, it’s vital that you remember; it’s only the gains you make that are taxed, not the total amount you receive when disposing of your asset. 

For example, if you buy a house for £200,000 and sell it at a later date for £250,000, the Capital Gains Tax will apply to the £50,000 profit you made. 

In the context of how CGT works, disposing of an asset includes: 

  • Selling it
  • Gifting it 
  • Swapping it 
  • Getting compensation for it (if the item was lost or destroyed and was covered by insurance)

Not all assets are subject to Capital Gains Tax, so it’s crucial to understand the exemptions. You won’t be liable for CGT if your gains fall below the allocated allowance (£12,300) for the tax year. Other exemptions from paying CGT include the following non-chargeable assets: 

  • Personal possessions worth under £6,000 
  • Personal vehicles
  • Your main home as long as the following are true:
    • You have NOT let part of it out (this does not include having a lodger)
    • Part of your home has NEVER been used for exclusively business purpose (temporary or occasional office space does not apply) 
    • The total grounds are below 5,000 square metres in total 
    • The purchase was made for you to live in the home, NOT for the explicit purpose of making a profit. 
  • Shares in an Individual Savings Account (ISA) or a Personal Equity Plan (PEP) 

Married couples have the ability to transfer assets from one another without needing to worry about CGT. However, once they separate this all changes and the rules will tighten quite significantly. 

CGT and Divorce: When Does it Apply? 

Capital Gains Tax and divorce is a complex topic, so let’s simplify. When married and still together, couples are totally exempt from CGT. However, a separated couple is a different case entirely. Partners in this scenario looking to transfer money and assets between each other are afforded an exemption of up to three years post-separation. 

For Capital Gains Tax purposes, married couples are considered ‘separated’ when there is a court order or separation agreement in place, or if a reunion is out of the question. Ultimately, the relationship must be over, with no chance of reconciliation.  

Once this three-year CGT exemption for couples expires, any transfers made between the former partners eligible for taxation will be seen as being between ‘connected people’, making it potentially subject to the levy. 

The Impact of Capital Gains Tax on Separated Couples 

The implications of Capital Gains Tax on separated couples in the United Kingdom can vary depending on the circumstances surrounding the breakup, the assets involved, and the timing of any asset transfers. Complex factors like Principal Private Residence relief and future liabilities upon the sale of transferred assets mean that contacting a legal specialist is always recommended. 

Here are just a few key points to consider when it comes to the impact Capital Gains Tax can have on separated couples:

No Gain, No Loss 

No gain, no loss disposals refer to the act of disposing of assets with no expectations of profit or loss being accrued to either party. Transfers between spouses or civil partners while they are living together are always treated as taking place on a no gain, no loss basis. 

Principal Private Residence (PPR) Relief

For a separated couple, Principal Private Residence (PPR) relief can have significant implications when it comes to dealing with shared property. If a couple has separated, but at least one spouse continues to live in the previously shared family home, PPR relief will apply, exempting them from CGT upon the property’s sale. 

It’s important to note that this relief may only be afforded under the proviso that the relevant parties meet certain conditions set out as part of the split.

If a separated couple decides to transfer property ownership in their separation agreement, they might benefit from PPR relief. PPR relief aims to prevent immediate Capital Gains Tax, recognising that it would be unfair to penalise and tax somebody for the increased value of their primary residence during such a transfer. If you have left the house, the final 9 months may still qualify for the relief. 

Principal Private Residence relief can be vital to presenting immediate CGT liabilities upon separation, making life in the wake of a breakup more financially manageable. This is especially important when there are children involved. 

For more information about what our dedicated team can do for you, get in touch today.

Time Limits Imposed

As mentioned above, the transfer of assets between separated couples must typically occur within a certain period of time following a separation (usually within the third tax year after the ending of the relationship). Anything outside of this timeframe will become liable for the levy.

Future CGT Liabilities

While the separation process can calm down after initial stress, the potential for Capital Gains Tax on separated couples can linger. It’s crucial to keep taxation in mind, even if there were no immediate liabilities during or immediately after separation. 

It’s important to be vigilant, as CGT implications can arise whenever the transferee decides to sell a transferred asset on. For CGT purposes, the base cost of the asset will be the cost at the time of transfer. 

Professional Advice

As you can see, capital gains tax on separated couples can be difficult when it comes to manoeuvring the various rules and regulations in place. Therefore, it is always recommended that you seek advice from a tax professional who specialises in divorce and family law. 

These dedicated professionals should be more than qualified to assess your circumstances and ensure that the division of assets is done in a structured and tax-efficient way. This maximises the available reliefs and exemptions available to you, many of which you are unlikely to be knowledgeable about. 

It’s important to note that Lowry Legal are not tax advisers and tax rules are often subject to change, therefore any questions regarding CGT should be directed towards a recognised tax professional before you make any decisions about financial planning.

Lowry Legal: Clarity and Support When You Need it Most 

Within the intricate landscape of the ending of a long-term relationship, the better guidance you find, the more support you can expect to receive. At Lowry Legal, our team of specialist family & divorce lawyers specialise in all manner of things, including helping ease you through the impact of Capital Gains Tax for separated couples. 

As you navigate the various intricacies of this journey, our dedicated experts are on-hand to offer tailored solutions. With a focus on empathy and expertise our team is 100% committed to securing the best outcome possible for you and your family. When your situation gets tough, Lowry Legal is here as your trusted partner.  

Explore the peace of mind that comes as part and parcel of our breed of experienced legal support — contact Lowry Legal today and let us guide you through the complexities of separation and better safeguard your financial future.