Changes ahead in capital gains tax rules for divorcing couples

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.

Linda Pope, a solicitor in the family team with Miles & Partners in London explains, ‘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.’

It is important to note that these rules are not yet law, and may change prior to April 2023.

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.

The new rules due to come into effect from April 2023

Subject to confirmation, the new rules which relate to transfers which occur after 6 April 2023 will allow for a longer period of the ‘no gain, no loss’ rule for up to three years after the year spouses cease to live together.  The ‘no gain, no loss’ rule will also now apply to assets that are transferred between spouses as part of a formal divorce agreement.

In addition, two further reliefs will be permitted in relation to the former matrimonial home.

• If you retain an interest in the home, you will be given an option to claim Private Residence Relief (PRR) when it is sold.
• If you have transferred your interest in the home to your former spouse, but remain entitled to receive a percentage of the proceeds when that home is sold, you will be able to apply the same tax treatment to those proceeds that applied when you transferred your interest to your former spouse.

How will the new rules impact me?

The circumstances for each couple will be unique, so it is important to contact our solicitors as soon as possible to discuss the implications of the new rules.

By way of illustration, we look at a few examples of how the new rules can help.

• Scenario A – A married couple separated in May 2021, being the 2021/22 tax year. They agreed a division of their assets, so that the wife will transfer to the husband her interest in a rental property they jointly own.

If this transfer had occurred in the same tax year in which they separated, then it will not be subject to any CGT further to the ‘no gain, no loss’ rule.

If this transfer occurs in the tax year 2022/23 then it will be subject to normal CGT rules based on 50% of the market value less the wife’s 50% share of the purchase costs and associated legal fees.  The wife would be obligated to report this to HMRC within 30 days and pay any CGT within 60 days.

If the transfer is delayed and does not occur until after the new rules are implemented in April 2023 then it will be subject to no CGT under the new extended ‘no gain, no loss’ rule, and the husband will be taken to have received the asset at the original purchase cost.
The above scenario will apply to married couples or those in civil partnerships who separated from April 2019 onwards, as the new rules will benefit transfers within three years of a separation.

• Scenario B – A married couple separated in January 2018. They could not agree the division of their assets so instructed solicitors to issue court proceedings.  There are several assets involved and a number of valuations and reports have had to be obtained.  This, coupled with the delays caused due to Covid-19 has meant that their case has still not been concluded.  If their case does not conclude until after April 2023 then the new tax rules will be in force and any transfers made between them will be subject to the ‘no gain, no loss’ rule.  A formal divorce separation that transfers assets between spouses is not restricted to the new three-year rule.
• Scenario C – A married couple separated in August 2022. They reach agreement after the implementation of the new rules, that the wife will stay in the former matrimonial home and the husband will transfer his interest to her.  The husband is to obtain a 30% share in the proceeds when the house is sold.  The husband will be permitted to have his CGT Private Residence Relief remain despite the fact that he did not reside in the property at the time of sale.

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 Linda Pope in the family law team.

Depending on your circumstances, we may recommend an opinion from a tax adviser.  We have a number of tax specialists 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.

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.