Capital Gains Tax (CGT) is a tax that is frequently misunderstood or forgotten about. It is essentially a tax on the profit – known as the gain – made when an asset which has increased in value since its purchase is sold or disposed of. Only the gain is liable for tax rather than the entirety of the increased value. Disposing of an asset includes giving it away or transferring it to someone else, selling it or receiving compensation for it if it has been lost or destroyed.
CGT is due on the disposal of most personal possessions worth more than £6,000 (apart from motor vehicles), property that is not your main home, your main home if you have rented it out or used it for business purposes, shares that are not in an ISA or PEP and business assets. These assets are known as chargeable assets.
When calculating any Capital Gains Tax liability, there is a tax-free allowance known as an Annual Exemption Amount. Disposal of a chargeable asset will therefore only attract CGT liability on any gain over the Annual Exemption Amount. The current CGT Annual Exemption Allowance, for the year 2020 to 2021, is £12,300 for individuals and personal representatives, and £6,150 for trustees of settlements. The Annual Exemption Amount is reviewed and amended annually by HM Treasury, and any increase applied from the start of the next financial year.
It is important to consider any CGT implications when parties divorce, separate or dissolve a civil partnership. In these circumstances, the parties will need to reach an agreement in relation to the division of their joint assets and part of that settlement may, for example, include the sale or transfer of the family home from one party to the other.
The sale of the family home is generally covered by the Principal Private Residence Relief which enables disposal of your primary residence without tax liability on the gain. If, however, the family home is sold more than nine months after one party has moved out of the property, CGT may apply if there has been an increase in the value of the family home since the departing party left the property. The clock for the calculation of Capital Gains Tax starts ticking after the nine-month period. When calculating the liability, each party is treated individually for CGT purposes meaning each will pay tax on their own individual gain.
Consequently, in the event a couple separates and one of them leaves the family home to reside elsewhere, after nine months the family home is no longer considered that party's primary residence. If the family home is thereafter transferred or sold, the party residing elsewhere may be liable for CGT if at least nine months has passed since they moved out of it, and there has been an increase in value in the family home.
Separated couples can avoid the payment of CGT if the property is transferred from one spouse to the other in the same tax year as they separated, in which case no CGT will arise. This means that separated couples may need to act quickly when deciding on the division of joint assets that include their primary residence if one them intends to leave, or already has left, the family home.
Parties should also consider that CGT may apply on the disposal of other assets, such as holiday homes and rental properties.
For further information and advice on this issue, and other family law issues, please contact us for a free initial consultation on 01992 306 616 or 0207 956 2740 or email us.