Breaking up is hard to do!

It may sound a tad cold hearted but if you’re going to leave your marriage then it’s best to split on 6 April for optimum tax savings and to give you more time to sort out the financial arrangements. This is one tax area that often causes lots of problems.

When a couple are married and living together, if they want to transfer assets between each other they can do so without a charge to capital gains tax (CGT). But what many people don’t realise is that this tax benefit of marriage disappears at the end of the tax year following permanent separation, not on divorce.

Whether or not CGT will be payable depends on the nature of the asset. The main home will qualify as being CGT free on transfer assuming that it was the main residence throughout the entire period of ownership. This is because of principal private residence relief which is a CGT relief which applies on the sale or transfer of houses which have been occupied as someone’s main home. This relief is also extended for the last 18 months (recently reduced from 36 months) of ownership. There are also reliefs which allow trading business assets to be gifted without a tax charge and cash is also exempt. The problem areas are likely to be second homes or investment assets – for example shares or rental properties. Even though no proceeds change hands, if the current market value of an investment property is significantly more than was paid for it, then there will be a taxable gain.

The lesson here is that for couples contemplating separation, advice should be taken as early as possible, this will avoid any nasty tax shocks down the line, and HMRC becoming an unintended beneficiary of the divorce settlement!