Capital Gains Tax (CGT) and Divorce Settlements

September 27, 2022

The Government has recently announced proposals to change the rules that apply to transfers of assets between spouses and civil partners who are in the process of separating and/or divorcing. The measure is intended to make the CGT rules that apply to people in this situation fairer giving them more time to transfer assets between themselves without incurring a possible charge to CGT. If the changes go head, it is intended they will apply to disposals that occur on or after 6 April 2023.

Currently, spouses and civil partners who are living together can transfer assets between them on a “no gain or no loss” basis meaning that a CGT liability is not triggered. When they separate, the no gain or no loss treatment only remains available for any disposals in the remainder of the tax year in which the separation happened. After that, transfers are treated as normal disposals for CGT purposes. This means that couples separating in the first few months of a calendar year have very little time to negotiate and finalise a settlement if they are to avoid incurring a CGT liability after the end of the tax year in April.

It is proposed that a new Finance Bill will introduce the following:

Separating spouses or civil partners will have up to 3 years after the year they cease to live together in which to make no gain or no loss transfers.

The no gain or no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement approved by the court even if beyond the 3-year time limit referred to above.

These changes should ease the pressure on the parties at the time of settlement as more of their available resources will be put towards meeting their needs rather than discharging an immediate tax liability. However, CGT cannot be overlooked completely as negotiations will need to factor in that the party retaining the asset will ultimately be responsible for all the CGT payable on its eventual disposal.

The changes should also assist separating spouses and civil partners where their main asset is their home. Whilst the parties continue to live together, they both benefit from private residence relief (PRR) if the property is sold meaning that no CGT is payable. However, where one spouse has moved out of the property before it is sold or transferred, the departing spouse is no longer able to accrue PRR. This can mean that CGT is payable on the eventual sale or transfer to the remaining spouse if the departing spouse has been absent for some time. The new proposals would mean the departing spouse has an option to claim this relief when the property is sold assuming they have not declared another property as their principal private residence. Further, it is proposed that individuals who transfer their interest in the family home to their ex-spouse or civil partner but remain entitled to receive a percentage of the proceeds on eventual sale, shall be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest.

It is advisable that all separating spouses and civil partners take advice from a tax specialist to ensure any possible tax liabilities are properly considered when negotiating a financial settlement. However, if adopted, these changes should mean that the tax paid by separating and divorcing couples is significantly reduced. If you are in the process of going through a divorce or separation and wish to talk to a member of our Family team please contact us on 0121 705 7571.

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