When splitting or passing assets on divorce capital gains tax (CGT) may not be an immediate consideration. The inter-spouse transfer exemption is commonly understood, however this exemption may only apply in the first tax year following separation, with separation usually being regarded by HMRC as the date a couple ceased to live together (with the intention that separation is permanent) regardless of whether formal divorce proceedings have begun.
HMRC state that you and your spouse or civil partner are treated as living together unless you’re separated:
- under a court order
- by a formal Deed of Separation
- in such circumstances that the separation is likely to be permanent
In each case the marriage or civil partnership must have broken down. If the marriage or civil partnership has not broken down but the 2 of you do not live in the same house, you’re still treated as living together for CGT purposes.
Complications due to CGT can arise when trying to agree the split of assets on divorce, particularly where the transferring asset is illiquid and there is insufficient cash or liquid assets to pay the tax. If possible forward planning at the time of separation, or shortly after, may avoid a CGT headache.