Changes to capital gains tax on divorce

Throughout this article, please note that the reference to marriage, spouses and divorce applies equally to those in a civil partnership. 

Most of you will be aware that the sale or transfer of an asset can trigger the payment of capital gains tax (CGT). What is often overlooked, is that the sale or transfer of assets upon divorce, even if transferred to one another, can trigger a CGT liability. The consequence of overlooking and not dealing with this potential CGT can amount to several thousand pounds. The date for payment of that CGT liability could also be immediate, irrespective of whether any liquid capital is being released at that point.

There are changes afoot but to understand the changes, it is helpful to understand the current position. The Finance Bill 2023 is due to receive royal assent later this year and it is anticipated the changes will be backdated the beginning of this tax year (that is 6 April 2023). The intended changes will change the landscape of CGT on divorce.

The current rules

A transfer of assets between spouses is made on what is known as a “no gain, no loss basis.” This means that transfers between spouses do not incur any immediate CGT liability requiring payment. Instead, the CGT is deferred until the asset it is disposed of or transferred by the receiving spouse. This means that the receiving spouse will be considered to have obtained the asset at the original cost that the spouse who previously owned it bought it for.

Where spouses separate or divorce, the “no gain, no loss” principle only applies for the tax year of separation. It is rare for couples to consider the time of year in which separation occurs. It was, therefore, possible for couple to have anywhere from 1 day to essentially 1 year to agree the division of their assets depending on whether they separated on 4 April or anywhere after 6 April. This seemed quite unfair. Additionally, it isn’t uncommon for it to take longer than 12 months to agree the division of marital assets, either because the assets were complicated, the couple couldn’t reach agreement or delays in receiving the court order.

The new rules

There are no intended changes for couples who remain married.

Where spouses separate or divorce, the government has extended the “no gain, no loss” principle as follows:

  1. For an unlimited period where the transfer of an asset occurs as part of a legally binding financial order – i.e. the “no gain, no loss” rule would apply indefinitely in those circumstances;
  2. For up to three years after the year in which a couple cease living together

This relieves the pressure significantly and allows both parties ample time to consider matters carefully and seek both legal and financial advice as necessary. Neither party is penalised by having to meet an immediate CGT liability on a transfer if there is some delay in dividing the financial assets. Tax advice would still be recommended to understand the future potential tax consequences. Legal advice would also be required to obtain the most long-reaching tax protection which is only received on having a financial order.

You will likely be aware that there are some exemptions in respect of the payment of CGT, particularly in respect of the family home. Please look out for second article which will deal with CGT on the family home and the changes brought in by the Finance Bill 2023.

On the assumption The Finance Bill 2023 receives Royal Assent as anticipated, this is great news for separating couple. This does not however diminish the need for good legal and financial advice to ensure you receive the tax treatment you are expecting.

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Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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