Normal ‘no gain, no loss’ inter-spouse transfer rules still apply in the year that a couple separates. In subsequent years normal capital gains tax (CGT) rules will generally apply and therefore gains will be triggered based on the market value of assets in the event of any divorce settlement. There can be exceptions to this general rule when the main marital home is involved.
Principal Private Residence Relief (PPR) and divorce
A couple’s main residence will generally not be subject to CGT when it is disposed. This is due to PPR which broadly aims to relieve CGT on the sale of a main residence. Here, relief is available based on the period that it was lived in as the main home as well as the last nine months of ownership. PPR is relevant when the ‘leaving spouse’ transfers their half of the family home to the ‘staying spouse’ under a divorce settlement. If this is done within nine months of leaving then full relief should be available but otherwise a gain could arise based on the period of ownership when the property was not a main residence.
Boris and his wife Carrie purchased a (small) apartment in Mayfair for £3m on 1 April 2011. On 31 March 2017 Carrie threw Boris out and divorce negotiations ensued. Under a settlement Boris eventually transferred his 50% share in the property to Carrie on 31 March 2022 when it was worth £6m. Prima facie, Boris faces a £1.5m gain here but he needs to consider PPR. On the basis that he lived in the property as his main residence for six years and because he can enjoy PPR for the last nine months of ownership whether he lived there or not, he will enjoy 6.75 years of PPR out of the total ownership period of 11 years. This means that his actual gain would be £579,545 (4.25/11 x £1.5m). At a 28% residential capital gains tax rate the tax here would be £162,273.
This is not quite the whole story! A special extension to PPR may apply where one spouse moves out of the marital home and transfers his or her interest in that home to the other spouse (who continues to occupy the property) under a court order or other agreement which is made in contemplation of a permanent separation. This would mean that Boris could have extended his PPR to the date of transfer in the above example, thus avoiding any CGT liability. The catch here is that Boris would not then be able to claim PPR relief on any other property during that extended period. If he was renting a property then this point would not concern him.
Forbes Dawson view
This rule does provide some tax leeway in divorce cases. For an exiting spouse who moves to rented accommodation, they at least do not have to worry about the prospect of a CGT charge if it takes some time to finalise the transfer of their half of the property to the remaining spouse. In cases where divorce settlements drag on for years, whether it makes sense to take advantage of this rule will depend on whether the exiting spouse has acquired any property in the meantime and whether he or she is prepared to forgo PPR on that.
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