Capital Gains Tax and Divorce

As a general principle transfers of assets between spouses living together, including Civil Partners, are deemed to take place on a 'no gain, no loss' basis and no charge to tax will arise. The acquiring individual is treated as if the asset was acquired for a consideration of such an amount as would ensure that on the disposal neither a gain nor a loss would accrue to the individual making the disposal (section 58 TCGA 1992).

This can produce significant opportunities for mitigating Capital Gains Tax (CGT) liabilities otherwise arising by arranging assets so as to:-

- Make use of individual CGT exemptions available (currently £9,200);

- Utilise lower and basic rate tax bands.

This can often involve the transfer of ownership of assets prior to disposal, often at the "last minute". As the liability for CGT follows 'beneficial ownership' principles, rather than legal ownership, this can often be achieved by way of 'declaration' rather than the physical transfer and vesting of assets in the name of the recipient. A useful tool when timescales are tight!

The general principles outlined above only apply to transfers in a tax year when the couple are married, or civil partners, and living together at sometime during the tax year. The principles will therefore apply to transfers which take place in the year a couple permanently separate.

Thereafter however, such transfers, even if part of a financial settlement arising on divorce or dissolution, may give rise to a charge to CGT.

The reason is that, assuming the transfer of assets takes place in the year following separation, but when the parties are still married, or civil partners, then the disposal will be to a "connected person" as defined in the Taxation of Chargeable Gains Act 1992. Such disposals are deemed to take place at market value, irrespective of the consideration changing hands, if any.

So, take for example a husband transferring an investment property to his wife as part of an agreed financial settlement. The market value of the property at the time of transfer is £200,000 and had an original acquisition cost of £100,000. The gain arising after taper relief and annual exemption is £50,800 giving rise to a potential liability to CGT of £20,320.

In such cases it is imperative that the question of CGT is considered at an early stage in the divorce process.