20 March 2023

Changes ahead in capital gains tax rules for divorcing couples

By Emma George, Family Solicitor, Hayes + Storr.

At present, no capital gains tax (CGT) is charged on a transfer of assets between a married couple or civil partners who live together. If, however you are separated or divorced from your spouse or civil partner, then this tax relief does not necessarily apply.

The Office of Tax Simplification reviewed the rules relating to separating couples in July 2022 and proposed a number of recommendations which the Government have agreed to implement from April 2023.

The new rules mean that separating couples will be afforded more time to transfer assets between themselves without the risk of being charged CGT. This is a welcome change and will take one financial pressure off, allowing more money to be available to meet the needs of each spouse and any children.

What is Capital Gains Tax?

Capital Gains Tax is tax on the profit of an asset when you sell, dispose or transfer items/property that have increased in value since it’s purchase. The most common cause of Capital Gains Tax is the sale of property.

The current tax rules

Under the current tax rules, transfer of assets between former spouses or civil partners are made on a ‘no gain or no loss’ basis provided these transfers occur in the tax year in which they have separated. This means any gains or losses from the transfer are deferred until the asset is disposed of by the receiving spouse. The receiving spouse will be treated as having acquired the asset at the original cost paid when the transferring spouse purchased the asset.

If the transfer occurs after the tax year in which the spouses separated, then it is treated as a normal disposal and will be subject to Capital Gains Tax in the normal way.

What is changing?

Currently, spouses and civil partners who are in the process of separating must arrange for transfer and/or sale of assets within the same tax year to avoid Capital Gains Tax. After this period, transfers are treated as “normal” disposals for Capital Gains Tax purposes.

The change, which comes into effect on or after 6 April 2023, will mean that:

1. Separating spouses or civil partners be given up to three years after the year they cease to live together in which to make no gain/no loss transfers.

2. No gain/no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement.

3. A spouse or civil partner who retains an interest in the former matrimonial home be given an option to claim private residence relief (PRR) when it is sold.

4. Individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold, be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the home to their ex-spouse or civil partner.

What will this mean for separating couples?

The change will promote a fairer process for separating couples. As the average divorce takes around 12 months to conclude, it is clear that the Government are acknowledging that matrimonial finances can take a while to resolve.

The added time extension will also prevent couples from being rushed into making a decision about the finances, especially those involved in complex financial proceedings, which can allow them to focus on the bigger picture and provide them with sufficient time to seek legal advice about the transfer or disposal of assets.

How we can help

If you are contemplating divorce, or just want some preliminary advice on the steps involved and what tax implications there may be, please contact Emma George in the family law team on 01328 863231 or email emma.george@hayes-storr.com.

Depending on your circumstances, we may recommend an opinion from a tax adviser. We have a number of tax specialist that we work closely with to ensure the best financial outcome for you.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.