What should I do with a property in the French Alps in my divorce? HEATHER ROGERS replies

Navigating divorce proceedings can be emotionally taxing, and understanding the capital gains tax (CGT) implications adds another layer of complexity, especially when property is involved. This article addresses common concerns regarding CGT and jointly owned assets during divorce, focusing on scenarios involving property sales and buyouts, particularly for those with properties in the French Alps and the UK.

Understanding Capital Gains Tax Rules During Divorce

Transfers of assets between married couples or civil partners are typically treated under a ‘no gain/no loss’ principle, meaning no immediate CGT liability is incurred. However, this changes once legal separation occurs.

It’s crucial to grasp the general CGT framework before examining specific situations related to property and divorce settlements.

Updated CGT Regulations for Separating Couples

Previously, regulations stipulated that ‘no gain/no loss’ asset transfers between spouses were limited to the tax year of separation, often creating time pressure.

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Since April 6, 2023, revised regulations offer more flexibility, providing couples with extended timeframes to address these financial matters and alleviate pressure during decision-making.

Defining Separation for CGT Purposes

For CGT purposes, separation from a spouse or civil partner is defined as occurring:

• Following a court order or formal separation agreement.
• When circumstances indicate the separation is likely to be permanent.

It’s important to note that these ‘no gain/no loss’ transfer rules do not apply to unmarried couples or those not in civil partnerships.

Key CGT Rules for Divorcing Individuals

Here’s a breakdown of the CGT rules relevant to divorcing or separating couples, effective from April 6, 2023:

1. For asset disposals on or after April 6, 2023, separating spouses or civil partners have up to three years after the year of separation to make ‘no gain/no loss’ transfers.
2. There is no time limit for ‘no gain/no loss’ asset transfers when they are part of a formal divorce settlement or court-approved agreement. It is therefore vital to finalise a financial agreement and secure court approval concurrently with the divorce or legal separation to benefit from this extended timeframe. The ‘no gain/no loss’ treatment remains applicable to asset transfers within a formal divorce or court separation agreement, even if they occur beyond the three-year period.
3. A spouse or civil partner who retains an interest in the former family home can claim Private Residence Relief when the property is sold.
4. Individuals who have transferred their share of the former family home to their ex-spouse or civil partner but are entitled to a percentage of the sale proceeds will receive the same tax treatment on those proceeds as when they initially transferred their interest.

It’s important to remember that CGT can still arise during this period in certain situations:

• If assets, including property, are sold to a third party to generate funds, standard CGT rules will apply.
• Sales of overseas assets may be subject to different rules and potential tax liabilities in the relevant jurisdiction.

Addressing Your Specific Circumstances

Selling the French Apartment: Reporting Tax Liabilities

If you proceed with selling your French apartment, it’s imperative to declare the capital gain to both French and UK tax authorities, adhering to their respective tax regulations.

Due to established agreements between HMRC and international tax agencies, disposals will be cross-reported.

A double taxation treaty exists between France and the UK, ensuring you receive credit in the UK for any CGT paid in France.

Given the joint ownership, the capital gain will be divided equally between you and your spouse. Each of you can then utilise your individual annual CGT allowance (currently £3,000) to mitigate gains under UK rules.

You can report your gain to HMRC through the designated channels.

Reporting the property sale and CGT payment via the Capital Gains Tax Property Disposal Scheme within 60 days of completion is not required in this instance, as this legislation excludes overseas residential properties.

Instead, the disposal must be reported to HMRC by December 31st following the tax year of the sale, with any tax liability due by January 31st.

Buying Out Your Wife’s Share: CGT Exemption

Opting to buy out your wife’s share of the French apartment would not trigger a CGT event at the time of transfer.

This is because the transfer would be considered a ‘no gain/no loss’ transaction under the previously outlined regulations.

To reiterate, this ‘no gain/no loss’ treatment applies if the transfer occurs within three years of the end of the tax year of separation, or before the divorce is finalised, whichever is earlier. This time restriction is waived if the transfer is formalised within a divorce agreement or court order.

Regardless of the agreed buyout price, for CGT purposes, the property transfer to a spouse or divorcing spouse is valued at its base cost – the original purchase price, or their portion thereof.

When you eventually sell the property, you will be liable for CGT based on the original acquisition cost, as that is the deemed base cost for your ownership.

You will be able to deduct the initial purchase price, costs of improvements, and allowable acquisition and disposal expenses from this calculation.

Seeking Expert Guidance on CGT and Divorce

Prior to making any conclusive decisions regarding your property and divorce settlement, it is highly advisable to seek advice from a solicitor or qualified accountant.

For assistance with UK tax matters, resources are available to help you find a suitable accountant.

Given the French property, you may also require guidance in France due to differing regulations. A French Notaire, who manages property transactions, is well-placed to offer support on these matters.