Capital Gains Tax (CGT) and Divorce Settlements: The 2023 Update

October 16, 2023

Capital Gain Tax for Separation and Divorce

Prior to 6 April 2023, divorcing couples who were living together could transfer assets between them on a “no gain no loss” basis, meaning that a Capital Gains Tax (CGT) liability was not triggered immediately on transfer. Any gains or losses from the transfer were then deferred until the asset was eventually disposed of and would later be subject to CGT. However, this “no gain no loss” relief was only available until the end of the tax year in which the separation took place. This meant that couples separating early in the year had little time to transfer assets to the other spouse or civil partner to benefit from the relief.  

The new rules, implemented on 6 April 2023, have extended the period for claiming the relief. Divorcing couples are now given up to three years after the tax year in which they stop living together to make “no gain no loss” transfers. If the transfer takes place as part of a formal divorce agreement there is no time limit to make such transfers for CGT purposes.  

Under the previous CGT rules, the capital gains annual exempt amount for individuals was £12,300. This has now been reduced to £6,000. 

The Benefits of the New Changes

These changes should ease the pressure on the parties at the time of separation as more of their available resources can be put towards meeting their current needs rather than discharging an immediate tax liability.  However, CGT cannot be overlooked completely as the party retaining the asset must understand that they will ultimately be responsible for the CGT payable on its eventual disposal.

The changes should also assist divorcing couples where the main asset is the family home.  Whilst the parties continue to live together, they both benefit from private residence relief (PRR) if the family home is sold meaning that no CGT is payable.  The new rules provide a spouse who has moved out of the family home with the option to claim PRR when the family home is sold, assuming they retain an interest in the family home and have not declared another property as their principal private residence. Further, 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 divorcing couples take advice from a tax specialist to ensure any possible tax liabilities are properly considered when negotiating a financial settlement as this remains a complex area.

If you are in the process of separating or divorcing and wish to talk to a member of our Family team, please contact us on 0121 705 7571. 

Charlotte Peplow
Trainee Solicitor – Commercial Department

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