When couples separate, one of the last things they might be thinking about is tax.
Unfortunately, the division of the matrimonial home and other properties between the couple may trigger a capital gains tax bill ("CGT").
CGT is a tax charged on the transfer (or sale) of a property. It is a tax on the increase in value since the property was acquired. CGT is charged at higher rates for residential properties than for other assets, being charged at 18% (for basic rate taxpayers) or 28% (for higher rate tax payers). In the current 2017/18 tax year the first £11,300 of gains for each of the couple is CGT free.
When a married couple (or civil partners) are living together, any properties transferred from one to the other pass CGT free. When a couple separate, this relief from CGT is extended but only until the end of the tax year of separation. After that the relief is lost. The CGT relief for spouses is therefore only available for a short time. This is a particular issue if a couple separate near to 5 April, when it can be impractical to expect agreement to be reached in time to avoid the CGT.
Take, for example, a couple who own a rental property and separate. They decide that one spouse shall transfer that house to the other. If this transfer is agreed in a contract between them in the tax year of separation then the transfer is CGT free. If, however, the couple agree the transfer in any following tax year, then any gain in value of the property will incur a CGT bill to be paid by the transferring spouse. In that case it may be worth considering whether the transfer could be made from the spouse paying tax at the lowest rates and with the most available annual exemption, or spreading the transfer over tax years.
The opportunity to hold-over, or defer, CGT until the property is subsequently...