Tax implications of transferring properties on divorce/separation

There are tax implications of transferring properties on divorce/separation that you need to consider when considering a formal separation or divorce proceedings.

Tax implications for transferring properties on divorce/separation will be dependent on the time that you separate/divorce as some tax exemptions are only available until the end of the tax year of separation. You need to consider Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) implications on transferring or disposing of property carefully.

What is Capital Gains Tax?

Capital Gains Tax (CGT) can arise on the sale or disposal of an asset if the asset has increased in value and is higher than the original value of the asset.

You do not pay CGT when you sell or dispose of your main home, however, divorce or separation can affect this.

If you are married in or a civil partnership, you can transfer assets i.e., property/main residence from one another without any CGT liability.

The rate you pay for capital gains tax depends on the level of your taxable income and the type of property being disposed of.

If you are liable for CGT when selling a residential property, you’ll pay 18% capital gains tax (CGT) as a basic-rate taxpayer, or 28% if you pay a higher rate of tax. For other properties, such as land or office building, you’ll pay 10% capital gains tax (CGT) as a basic-rate taxpayer, or 20% if you pay a higher rate of tax.

Can I transfer a property during divorce proceedings?

The simple answer is yes, you can transfer and dispose of assets including property during divorce proceedings. However, you need to consider the timing of the transfer in relation to your separation event and the end of the tax year.

Is CGT payable on transfer of property to spouse?

Capital Gains Tax isn’t payable on transfer of your main residence or any other property to a spouse normally during marriage. However, during separation Capital Gains Tax may be payable if you separate and then transfer property in different tax years.

A property transfer will be at no gain/no loss for Capital Gains Tax purposes, provided the transfer occurs in the tax year in which the separation occurs i.e., before the following 6 April.

For example, if a couple separate part way through the tax year 2022/23, any transfers between them up until 5 April 2023 will take place at no gain no loss. “No gain no loss” treatment does not apply after 5 April 2023 because the couple are separated.

Please note for disposals/transfers after 6th April 2023, separating spouses will have up to three years to transfer the properties to each other from the year they stop living together.

How do I avoid Capital Gains Tax in a divorce?

If your separate from or divorce your spouse or civil partner you can avoid Capital Gains Tax liability when transferring the property from one party to another if you separate and transfer the property in the same tax year, i.e., before the following 6 April.

For disposals occurring from tax year 2023/24, spouses or civil partners will have up to 3 years to transfer the properties at no gain/no loss from the year of separation.

Further any transfers of assets that are due to take place as part of formal divorce agreement will have an unlimited time window for the no gains/no loss treatment to apply.

How does HMRC determine the date of separation?

For the purposes of Capital Gains Tax, you are deemed to have “separated” from one another if:

1. It is expressed in a Court Order;
2. It is expressed in a Separation Agreement; or
3. In such circumstances that the separation is likely to be permanent.

Once the date of “separation” is determined, transfers between married couples or civil partners will be deemed to take place at market value, which could lead to a liability arising with regards to Capital Gain Tax. This will all depend on what date the transfer or disposal is deemed to have taken place on in relation to the tax year.

How does HMRC determine the date of disposal/transfer of property?

During any divorce you will be negotiating a financial agreement or financial settlement. Divorce proceedings conclude on receipt of Decree Absolute and financial matters conclude on receipt of a Judge approved sealed Consent Order.

It is worth considering the transfer of the property prior to the Decree Absolute to time the transfer in the same tax year. In this case the date of transfer / disposal will be the date the Judge approved the Consent Order and not the date of the Decree Absolute.

If wait for Decree Absolute before you transfer / dispose of the property, the date of disposal or transfer will be the date you obtain your Decree Absolute.

If you choose to make transfers without having a Consent Order, the date of disposal will be the date any contract is signed/completion date of the transfer.

Paying Capital Gains Tax on divorce

If you separate and transfer the property in different tax years, then you may have to pay Capital Gains Tax. You’ll need to get a valuation of the asset on the date of transfer, and use it to work out the gain or loss.

If you exceed the time period that you qualify for Capital Gains Tax exemption, transfers between you and your spouse will be treated as made between connected persons until the decree absolute.

The rules for working out your gain or loss are complex. Get professional tax advice from accountants such as dns accountants.

You’ll need to tell them the date of:

• the final order or decree absolute if you’re divorced.
• the final order if you have ended a civil partnership.
• any court order if assets were transferred this way.
• any other contract showing the transfer of assets.

When is CGT paid on a separation or divorce?

CGT arising on a separation or divorce cannot be deferred. If the gain is on residential property and is not exempt, then for disposals on or after 27 October 2021 you need to report and pay the tax within 60 days of the disposal.

For disposals of other property, the gain must be reported by 31 December in the year following the tax year in which the disposal occurred.

Stamp Duty Land Tax (SDLT) on divorce

In general, there is no exemption for SDLT on transfer of properties between spouses or civil partners living together. The only relief is that the transfers are charged at the standard residential rates and the 3% higher surcharge will not apply on these transfers.

The transfer of properties will be exempt from SDLT if they are in connection with the divorce or breakdown of the marriage. The exemption will only apply if the transfer is made under a court order, judicial separation or in connection with the dissolution or annulment of the marriage.

Further, the transaction between the couples will normally be exempt and any transfers involving a third-party will still be subject to SDLT.

Summary

Divorce and separation are stressful times for any couple, however, you really do need to carefully consider the timing of transferring or disposing of properties or when you transfer assets during separation and divorce for capital gains tax purposes.

Whilst CGT has the most significant implication during a divorce, there are all sorts of other tax implications of divorce if you own and run a company (such as dividend income from family businesses and trusts).

It is vital to seek advice as soon as you consider separation or divorce from a marriage or civil partnership.

For more help and tax advice on the consequences of divorce and separation, speak to one of our tax experts. Simply, call us today on 03300 886 686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.