This insight will highlight the tax implications following the breakdown of cohabitation and what unmarried couples should think about during this process. If you are currently married and need advice on tax implications following divorce – take a look at our previous insight, Tax Implications Following Separation and Divorce.
What is capital gains tax?
Capital gains tax (CGT) is a tax on the profit when you sell or ‘dispose’ of an asset in a tax year. It is the gain you make that is taxed, not the amount of money you receive. The definition of a disposal includes not only a sale of an asset, but also a disposal by way of gift or a transfer under a financial settlement. You only pay CGT on your overall gains above your tax-free allowance (called the Annual Exempt Amount). To find out what the annual exemption is for the current tax year visit: CGT allowances
Losses can be offset against the chargeable gain. Losses are firstly offset against gains arising in the same tax year. If losses exceed the gains arising in the same year, the losses are carried forward to be offset against future chargeable gains.
If you dispose of an asset you jointly own with someone else, you only pay CGT on your share of the gain.
What assets do you pay capital gains tax on?
You pay CGT on the gain when you sell or dispose of chargeable assets, examples of which include:
- Personal possessions worth £6,000 or more each, apart from your car.
- Property that is not your main home.
- Your main home if previously let, used for business purposes or if the garden and grounds exceed 0.5 of a hectare (just over an acre or 5,000 square metres) and do not meet certain tests.
- Shares not held in an ISA or PEP.
- Business assets (subject to meeting required conditions).
If you sell or give away crypto assets (like crypto currency or bitcoin), you should check if you have to pay CGT.
What assets are exempt from capital gains tax?
You do not pay CGT on gains you make from:
- Your car, including classic cars.
- Gifts to UK registered charities.
- Personal belongings or chattels where the sale proceeds are less than £6,000 each.
- ISAs or PEPs.
- UK government gilt-edged securities, for example, national saving certificates, premium bonds and loan stock issued by the Treasury.
- Betting, lottery or pools winnings.
- Personal injury compensation.
- Cash.
- Foreign currency held for your own use.
How to work out your capital gains tax
To calculate whether CGT is payable, you will need the following information:
- Acquisition cost.
- Current market value or, if a sale has taken place, the sale price/net proceeds of sale.
- If additional funds have been used to buy, sell or improve the property the following can be deducted:
- Fees or commission for professional advice or services, e.g. CGT valuation, solicitor and estate agent fees.
- Improvement costs increasing the value of the property, but not maintenance costs such as repairs or decorating.
- Stamp duty and VAT.
- Capital losses on disposals in the same tax year and capital losses brought forward from previous tax years.
CGT on asset transfers
As a general rule, transactions that are not at arm’s length must be recalculated as having been at market value. A transaction between a cohabiting couple may therefore be treated as not having been at arm’s length.
In this situation, the sale is deemed to take place at market value, regardless of the actual proceeds that are paid (if any). A chargeable disposal will arise, and CGT will be due (subject to any annual exemptions, reliefs and losses available).
CGT on overseas assets or if you are abroad
You may have to pay CGT if your asset is overseas, for example a holiday home that is not listed as part of the financial settlement. If this applies, the impact of foreign currency movements on the disposal will need to be considered. In addition, there may be local taxation issues to consider. In the same way as for any other chargeable asset, the acquisition cost and value on disposal of a property will be calculated by reference to Sterling at the relevant dates. This can give rise to seemingly paradoxical results, whereby the value of a property may have decreased in local currency terms but have increased in Sterling terms (or vice versa) as a result of movements in exchange rates.
You have to pay tax on gains you make on property and land in the UK, even if you’re non-resident for tax purposes. You do not pay CGT on other UK assets, for example shares in UK companies, unless you return to the UK within 5 years of leaving.
Principal private residence relief
Principal private residence relief (PPR) provides an exemption from CGT on an individual’s main residence (including grounds of up to half a hectare). An individual can only have one PPR at a time.
No relief is available for any proportion of the property that is used exclusively for business purposes, including a letting business. For example, if a garage has been converted into a therapy room, no PPR relief will be given on the proportion of the gain relating to the garage. The split is usually calculated based on area, but any just and reasonable method of apportionment can be used. HMRC accepts that the position is different if the tenant is a lodger sharing communal spaces with the owner.
Lettings relief may be claimed if owners have occupied the property at the same time as their tenants, provided they were not carrying on a trade or business.
PPR is only available for the period in which the individual has lived in the property, no other exemptions are available for unmarried couples.
If the relevant person has moved out of the property prior to its sale or transfer and that period of absence exceeds 9 months, any gain must be time apportioned to the period of living in the property (plus a 9 month exemption) and the remaining period of ownership. The remaining period of ownership will be subject to CGT.
When is capital gains tax payable?
A 60-day reporting and payment period is required on residential property. A standalone return will be required to be submitted to HMRC within 60 days of completion, along with a payment on account of CGT based on an estimated calculation of the gain. Capital losses and available reliefs can be factored in. The reporting period is reduced to 30 days if you are non UK resident at the time of sale.
Using a family-owned company to fund a financial settlement
It is essential to seek advice if you are intending to dispose of shares or assets in a private limited company. There are a number of ways the business can fund a settlement and it is essential that you get advice on the best way of extracting the funds, and the reliefs and exemptions available.
Business Asset Disposal Relief (formerly Entrepreneurs Relief) is available to individuals who are disposing of shares or assets in a private limited trading company. The individual must own at least 5% of the overall share capital and have held the shares for at least 24 months prior to the disposal.
Stamp duty land tax (SDLT)
If joint owners are unmarried when they transfer an interest in land or property from one joint owner to another they may have to pay SDLT.
SDLT is not payable if 2 or more people jointly own property (as joint tenants or tenants in common) and they divide it physically and equally and own each part separately.
If one person takes a bigger share, or all of the other’s share, SDLT will be charged on any transfer, based on the consideration given for the transfer including:
- any cash payment;
- any assumption of a liability to pay a mortgage: the liability assumed is taken to be a proportion of the outstanding mortgage corresponding to the proportion of the share of the property that is acquired.
The additional dwellings rate will not be charged where there is a property exchange where a co-owner adds to an existing interest in their main residence.
Tax implications on cohabitation breakdown- conclusion
Tax implications on separation can be complex and costly if you do not seek professional advice. The team at Watson Morris Family Law can help you navigate the tax implications that may arise on the breakdown of your cohabitation. This insight is for general guidance only and should not regarded as legal or financial advice.
For an initial free no obligation discussion to see how we can help please contact us.
Written by Caroline Watson
November 14, 2023
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