How to transfer your assets following a separation

When couples separate, tax issues aren’t generally at the top of your list of worries. But the rules around disposal of your shared home may have some unexpected tax consequences.

We’ve highlighted the main areas to be aware of, and how to plan the transfer of assets in a way which keeps both parties – and HM Revenue & Customs (HMRC) – happy.

A change in living arrangements to agree on

The decision to separate from your partner will usually mean a change in living arrangements.

Your shared home may be sold, with each of you making new arrangements. Or one partner may remain in the home, with the other partner surrendering their interest in the property. Another option may be for one partner to remain in the property until (for example) minor children come of age, and for the property to be disposed of jointly at that point.

Under normal circumstances, a transfer of assets between spouses is made on a ‘no gain/no loss’ basis. The transferee is treated as if they’d acquired the asset when their partner acquired it, at the cost incurred at that time. But when a couple separates, that same rule applies only until the end of the tax year in which they separate.

After that, any transfer is deemed to have taken place at market value, with taxable capital gains potentially arising once the transfer is made.

So, what does this mean for your tax liabilities?

• Gains that are attributed to the period in which the property was the taxpayer’s main residence, as well as gains attributed to the last nine months of ownership, are tax-free under the current Private Residence Relief rules.
• Any chargeable gain needs to be reported to HMRC within 60 days of completion.
• Where a partner has moved out, they may elect for the previous marital home to continue to be treated as their main residence for CGT purposes. This can reduce the tax payable on the eventual sale of that property, but it also means that any property they’ve purchased elsewhere will not benefit from the private residence relief.

How to plan for this CGT impact

So, how will this potential CGT impact affect your tax liabilities and your plans on where to live, following the separation from your partner?

• Until the end of the tax year in which a partner leaves the marital home, you can transfer your share of the property to the other partner without any CGT implications.
• Where you both remain in the home until it’s sold, or move out no longer than nine months before sale, no CGT will arise. This is based on the presumption that the property has been your main residence throughout.
• If the property’s sold more than nine months after a partner moves out, and that partner has elected a different property as their main residence, then taxable gains could potentially arise.
• If instead of selling the property to a third party, one party transfers their interest to the other, there are no tax implications – provided that transfer takes place before the end of the tax year in which the departing partner moved out, or within nine months of that partner moving out.
• After that point, the party who’s left may have a capital gains tax liability, based on the difference between the market value of the property when the share was transferred, and the original acquisition cost. That will be reduced by any applicable private residence relief.

Talk to us about your plans following a separation

Going through the emotional upheaval of a divorce or separation is tough for everyone involved. To reduce the worry and stress of coping with the tax implications of a split, talk to us about your plans and let us help lighten the load a little. Separating and divorcing couples should talk to their accountants about any capital gains tax implications arising from their separation.