What is Capital Gains Tax?
Capital Gains Tax is applied to any profit made when you sell or dispose of an asset that has increased in value since you first purchased it. This could include property, shares or, bonds, a business, or valuable possessions that are sold for more than £6,000.
Other types of assets can include:
- Properties, other than your home
- Business assets
- Cryptocurrencies
- Artwork
- Jewellery
An asset is considered as being “disposed” of when you’ve either:
- Given it to someone as a gift
- Swapped it for something else
- Received compensation for it, such as an insurance payout if it’s been lost or destroyed
Under the previous legislation, separating couples are very limited in the time they are given to sell or dispose of assets before Capital Gains Tax is applied. But with the new updates, couples now have much more time to divide their assets.
With the new update in action, separating couples will have up to 3 years to make no gain/no loss transfers, which allows the couple to focus on the divorce settlement rather than Capital Gains Tax. Divorce proceedings are already complex, so it’s hopeful that this will give some room for the separating couple to get their affairs in order before having to think about Capital Gains Tax.
Assets that are Exempt from Capital Gains Tax
While certain assets are used to be added to your Capital Gains Tax, there are many assets that aren’t included, such as:
- Property that is your main residence
- Shares in an ISA
- Premium bonds
- Winnings from lotteries
- Cars
- Donations to charity
What is the Annual Exempt Amount?
The Annual Exempt Amount refers to the amount of gain that an individual may earn that is free from any Capital Gains Tax. This can also be referred to as Capital Gains Allowance.
Is the Update Good News?
The update to the Capital Gains Tax rules could provide a significant step forward for helping partners separate in as tax efficient way as possible. If you and your partner are separating, the new rules will allow you to do so in a way that allows you to divide assets.
What Will the Impact Be on Individuals?
It is forecasted that this update will be a positive change for individuals and their families. The aim is to make the divorcing and separation process fairer for everyone who is in the process of dividing their assets.
The Government believe that this update will have a positive impact on those affected as it will extend the period of time that they need to make a no gain/no loss transfer between themselves – giving them now up to 3 years.
This update will particularly benefit anyone who is in a more complex divorce proceeding, so that more time can be used to focus on the divorce itself, rather than Capital Gains Tax. For example, if there’s a lot to sort out for childcare arrangements and other agreements, the couple can pay more attention to the things that matter before turning their focus onto financial matters.
It’s also thought that this change will avoid the depletion of household income or the accumulated household wealth, by allowing the couple to transfer and dispose of assets in a way that benefits them.
What Were the Previous Rules?
Under Section 58 of the Taxation of Chargeable Gains Act 1992, couples who are living together as spouses or civil partners are able to transfer assets between each other on a no loss no gain basis for as long as they are cohabiting.
When spouses or civil partners divorce, they will only be able to transfer or dispose of assets without Capital Gains Tax being applied until the end of the tax year in which they separate.
After this time period, all transfers and disposals will have Capital Gains Tax applied to them. This can create a significant amount of stress for separating couples as they rush to distribute and sell their assets.
More time to deal with everything
“Going through a divorce can be stressful enough without parties being subject to strict and tight timescales for transferring assets to minimise tax. Once the new rules are in place, couples will have more time to deal with the transfer of assets, which will hopefully minimise the emotional and financial pressure involved.”
Lorraine Harvey, Family Law Partner
Simpson Millar Solicitors
What Are the Main Changes Proposed?
As well as the extension of the time limit on when separating couples can transfer their assets on a no loss no gain basis, the new proposals will mean:
- A spouse or civil partner who retains interest in a previously shared home can claim Private Residence Relief (PRR) when it is eventually sold.
- Individuals who have transferred interest in the former matrimonial home to their ex-spouse or civil partner will get the same tax treatment when the property is sold as when they originally transferred the interest.
- Where assets are the subject of a formal divorce agreement, there will be no time limit on when they can be transferred or disposed of on a no loss no gain basis.
Our Family Law Solicitors are experts and can advise you on how best to divide your assets, settle your finances and give you peace of mind that you won’t pay any unnecessary Capital Gains Tax. Get in touch today for further advice.
Will You Be Affected By the Changes?
The Government released a report that suggests that in the 2023 to 2024 tax year around 500,000 individuals could be affected by the changes to Capital Gains Tax, increasing to 570,000 the following year.
When you’re in the early days of divorcing, it’s important for you to consider the division of your assets and make sure that you seek the appropriate legal advice. While this has always been a critical part of a divorce proceeding, it’s more so when you need to consider the impact of Capital Gains Tax.
If you fail to transfer your assets before the end of the tax year, you may get an unexpected Capital Gains Tax bill if you decide to transfer the assets in the future.
A lot of couples who are divorcing don’t take into account any tax implications during the proceedings. As a result, they are then hit with a Capital Gains Tax bill during a tough time. By planning ahead, you can make sure that this doesn’t happen to you.
Cohabitees
Unfortunately, if you aren’t married but you live together with your partner as if you are married, then you will not benefit from the updates to Capital Gains Tax. You must be married or in a civil partnership in order to benefit from the provisions.
International Considerations
If you benefit from dual tax residence, you will need to consider any remedy that is needed for double tax treaty between the jurisdictions of residence.
For example, if you’re a US citizen and own property in the UK, you may be eligible for private residence relief when you transfer the property between you and your partner. Although, the US tax authority doesn’t recognise the same exemption and as a result, a transfer may increase Capital Gains Tax liability in the US.
If you’re unsure on how this may work for you, our solicitors can help offer some legal advice on the best way forward.
How Much Capital Gains Tax Will I Pay?
The Capital Gains Tax that you will pay will depend on your income tax band. You’ll find that you pay different rates of tax depending on whether the gains are from residential property or other assets during the divorce.
If you usually pay the higher rate income tax, then you’ll have to pay 28% on your gains from residential property and 20% on your gains from other assets.
However, if you fall under the basic rate bracket for income tax, then you must work it out as follows:
- You’ll start by working out how much your total taxable gains amount to
- Then you need to deduct your tax-free allowance from that
- Once you’ve done this, add this amount to your total taxable income
- If the total amount is within the threshold for basic Income tax then you will simply pay 10% on your asset gains and 18% on your residential property gains.
- For any income above the basic tax rate, you’ll pay 20% on gains and 28% on residential property gains.
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