Understanding the role of capital gains tax in a divorce

Going through the process of a divorce can be an emotional and stressful time in anyone’s life. Not only is the personal sorrow of separation difficult to deal with, but there are also many legal complexions with regards to division of assets that can become especially long-winded and tiring.

One of the most complex legal issues surrounding a asset division in a divorce is Capital Gains Tax (CGT). There are very specific rules from the HMRC on when the transference of an asset to your ex-partner becomes subject to this specific tax.

In this article, we will delve deeper into Capital Gains Tax, what it actually is, what you pay this tax on, how to calculate it and when it may be applied during divorce proceedings.

What is capital gains tax?

Imagine if 20 years ago, you purchased a watch from an antique shop for the sum of £4,000. Following a recent valuation, you have discovered that during the past two decades, that watch is now worth £20,000. This is enough of a profit to make you want to sell the watch and so, you put the item up for sale and sure enough, you fetch £22,000…giving you an extremely healthy £18,000 profit.

However, in this example, you would be required to pay Capital Gains Tax on your watch profit. The HMRC offers an annual threshold of £12,300 before having to pay this tax on your sale. Since you fetched £18,000 worth of profit, you will need to pay Capital Gains Tax on the £5,700 profit over the threshold.

This inflated example is principally explaining that Capital Gains Tax is a mandatory tax paid to the HMRC on any profit you make on the sales of an asset over the £12,300 annual allowance.

There are additional caveats to the payment of CGT. If you don’t make full use of your annual Capital Gains Tax allowance, this cannot be carried forward into the following year. The threshold simply resets at the end of each fiscal period.

What do you pay capital gains tax on?

It is important to understand what assets you may need to pay Capital Gains Tax on. Firstly, any personal possessions such as fine art or jewelry are liable to CGT.

Property is also subject to this tax. Importantly however, the sale of your primary residence is absolutely not included in this, only secondary residences or other properties owned are. The only reason that your declared primary residence would be susceptible to CGT is if you have let it out or used it for business purposes.

Finally, the sales of any shares that are not in an Individual Savings Account (ISA) or a Personal Equity Plan (PEP) account, as well as any business-related assets are subject to Capital Gains Tax.

How to calcuclate capital gains tax?

Let’s return to our example of the sale of the watch. In this scenario, you have made £18,000 worth of profit. As we now know, this is over the annual threshold set by the HMRC and therefore is subject to Capital Gains Tax.

The current flat rate of CGT in the United Kingdom is 18%, meaning that you will need to pay tax at this rate on the £5,700 worth of profit over the annual allowance.

The implication is that you will need to declare and pay the HMRC £1,026 in Capital Gains Tax on the profit made through the sale of your watch.

Seek expert divorce advice with Waldrons

If you are going through a divorce, you may be required to pay Capital Gains Tax when moving assets to your partner. However, there are significant complexities to this. If the transfer happens before a divorce is finalised, no CGT will need to be paid. The same can be said if the divorce has been confirmed but you were still living together at any point during the tax year in question.

Transference of assets to your partner may be liable to Capital Gains Tax if this transaction occurs after the relationship has legally ended.

The HMRC makes it clear that this can be a very complex process and so recommends seeking professional help.

At Waldrons, we have decades of experience dealing with the legalities around divorce, including Capital Gains Tax liabilities. If you want to know more, or wish to seek advice, a free phone consultation with you can be arranged, to see how Waldrons can be of assistance and take the added stress away from what is an already emotional time.

Contact Waldrons solicitors

Whatever your family law query, get in touch with us here at Waldrons today.

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Last reviewed on 11/07/23 by Alka Wood who is a Solicitor