Capital Gains Tax on Divorce

Proposed Capital Gains Tax Rule Changes Could Reduce Stress for Divorcing Couples

The government has proposed a number of changes to the capital gains tax (CGT) rules which, if enacted, will come into effect from 6 April 2023. The rules are good news for divorcing couples and may relieve a significant source of financial pressure from the divorce process. In this blog post, we outline the key changes and explain how they could impact your divorce.

The current law with regard to Capital gains tax on divorce

Under the current law, married couples and civil partners can transfer assets such as houses and flats or shares between themselves free of tax providing the transfer is in the tax year of separation. This is known as the ‘no gain, no loss’ rule. When the receiving spouse sells the asset in the future, they will pay CGT as if they had purchased the asset at its original value.

So a couple that separates in December 2022 can only transfer assets using the ‘no gain, no loss’ rule up to 5 April 2023. After that, transfers of property and assets will be subject to CGT in the usual way.

Many people have criticised this very short time window for tax-free transfers. That’s because it forces some couples to stay in an unhappy relationship for longer than they want to, solely to wait for a new tax year to start so they can avoid a hefty tax bill.

The proposed changes to the law regarding CGT on divorce

The new rules give divorcing couples up to three years in which to make exempt transfers – and an unlimited period if the transfers are part of a formal divorce agreement (in an Order).

They also make some important changes to the tax relief you get when selling a family home. Often in a divorce situation, one spouse will move out of the family home and transfer their share to their ex-partner, deferring their share of the sale proceeds until the home is sold in the future, perhaps when the children turn 18 or move out. As it stands, the departing spouse cannot claim Private Residence Relief once they have moved out, which can mean a significant CGT bill on the eventual sale.

The new rules give the departing spouse an option to claim Private Residence Relief on the eventual sale of the home, even if it takes place many years in the future. This basically puts them in the same position tax-wise as if they had not moved out.

What does this mean for divorcing couples?

The proposed change will give couples more flexibility and more time to consider how to divide the assets. It will reduce the financial pressure on couples who would previously have faced a significant tax liability.

Assuming they are enacted, the new rules will apply to transfers that take place after 6 April 2023. Any divorce-related transfers you make before this date will already be on a no gain, no loss basis, (as it will be in the current tax year) and the new extended time window will then apply to any transfers made on or after 6 April 2023. In other words, if the changes are enacted, you don’t have to wait for the new rules to kick in and can benefit from the changes straightaway.

Unfortunately, the proposed changes only apply to married couples. CGT would still apply to transfers between unmarried couples.

If you would like to speak to a specialist family law solicitor about divorce matters, call Sarah Scott, or complete the online enquiry form below.