Changes to Capital Gains Tax (CGT) rules introduced in the Chancellor’s Budget and effective from 6 April 2014, will impact on couples going through a divorce or civil partnership dissolution who own a home jointly, where one spouse or civil partner has moved out.
It is fairly common in divorce or dissolution cases for a spouse or civil partner who has moved out of the family home to transfer their interest in that property to the other spouse or civil partner as part of the divorce or dissolution settlement
When a separation and transfer takes place within the same tax year (which runs from 6 April to 5 April each year) such transfers between one another may be done without incurring a CGT liability as the transfer may be treated as if the couple were still living together. Once a new tax year occurs and the married or civil partnership couple have separated, there are rules to decide whether CGT will become due on a transfer.
If the transfer takes place in the tax year after the parties separate, the transfer is a disposal for capital gains tax purposes and a gain may accrue. Before April 6th 2014, if you transfer your main residence to your spouse or civil partner, any gain is covered by Private Residence Relief and there is no CGT to pay as long as it has been your only or main residence throughout the time that you owned it. The final 3 years qualified for relief even if you weren’t living there but to get this relief a property must have been your main home at some point during the time that you owned it, This meant therefore that where the main residence is transferred between spouses or civil partners then the party that moved out may be regarded as having continued to occupy the home, so there may not be any CGT liability on the transfer, as long as the transfer took place within 3 years of separation ( the “last three years'” rule). However, with effect from 6 April 2014, the “last three years'” rule is to halve to just 18 months, so that CGT is may now be due if the property is not occupied by its owner for more than 18 months before being transferred.
What is clear from the change is that the greater the delay in resolving financial issues, the greater the risk that you may have a CGT liability when the family home or other assets are finally dealt with. It is therefore important that you obtain expert advice as soon as possible and spouses of civil partners not occupying the family home in particular should assess their position and seek advice from a divorce specialist and an accountant or financial adviser.
For more information contact Kerry Russell, Associate Solicitor on 0161 930 5151 or Kerry.Russell@gorvins.com