Breaking up is hard to do...

It may sound harsh 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…

Q: I separated from my wife in February 2015. We are finally getting divorced now. We have two properties, our family house which was in joint names and a buy-to-let, which was just in my name. We have agreed that I will keep the main house and I will gift the buy- to-let to her to live in. My solicitor has just mentioned that I should check out whether there will be any tax consequences.

A: 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 of permanent separation, not on divorce. So, in your case you lost the ability to transfer assets between one another tax-free on 6 April 2015.

Whether or not CGT will be payable depends on the nature of the asset. Your main home will qualify as being capital gains tax-free on transfer assuming that it was your main residence throughout the entire period of ownership. This is because of principal private residence relief which is a capital gains tax relief available on the sale or transfer of the main home. This relief is also extended for the last 18 months of ownership, so there will not be any tax charge on your ex-wife’s gift of half of the main home to you. There are 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 as in your case, rental properties.

Even though no proceeds change hands, if the current market value of the buy-to let property is significantly more than you paid for it, then there will be a taxable gain.

Q: I bought the buy-to let in 1997 for £70,000 and it’s worth £200,000 now – how much tax will there be to pay?

A: The capital gain is £130,000 which will be reduced by your annual exempt amount of £11,100. The amount of tax you have to pay depends on your other income but the rate will be between 18% and 28%, so you could have a tax bill of up to £33,292. 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!