Capital Gains Tax Implications of Divorce

Q: I am in the process of separating from my husband. We have a large buy to let portfolio which is all held in our joint names, and consists of properties purchased over many years. Deciding on who gets what might take some time – are there any tax angles I need to think about.

A: A recent divorce case ‘Owen v Owen’ has sparked a debate about ‘no-fault ‘divorce, and served as a useful reminder of the tax pitfalls of dividing up assets following separation and divorce
In the case of the unfortunate Owens’ there was a lengthy period of permanent separation, when the unhappy Mrs Owen’s found it impossible to carry on living with her husband, but wasn’t able to compel a divorce.
 
It is extended separation periods which can cause major tax difficulties.
 
In simple terms the Capital Gains Tax rules on separation and divorce are as follows:
• A married couple (and civil partners) are allowed, to make capital gains tax free transfers of assets (such as properties and investments) between one another based on the “no-gain no-loss” rules which apply to inter-spouse transfers. 
• This tax free status stops when a couple separates (which can be as a result of a Court Order, or by a Deed of Separation, or because they just separate permanently, even though they are not divorced)
• Tax free transfers continue to be available however until the end of the tax year in which separation occurs.
• After this time and until your divorce becomes absolute, you and your husband remain ‘connected parties’ for
 
Capital Gains tax purposes which means that Market Value must be used for calculating the tax payable on transactions between you, even though no money may change hands.
 
In your case, if you have held a buy-to-let portfolio for some time, it is likely that the market values of the properties could be significantly higher that what you paid for them and sizeable taxable gains could arise.
In practice what this means in your case is that it is far better to separate early in the tax year (i.e. as soon after the 6th April as possible), and then to use that tax year (i.e. up to 5 April the following year) to
work out who will be getting what and to implement the transfers.
 
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!