The Spring Budget has confirmed significant changes to the rules for capital gains tax (CGT) following a couple’s separation and subsequent divorce.

Nilah Ulhaq, Senior Solicitor in our Family Law team, and Laura Cumins, Private Client Tax Manager, discuss what those changes are and the impact upon couples who have separated or are thinking of separating.

When a couple separates, there are various financial matters which need to be resolved, for example, what will happen to the family home, will someone keep this or will it be sold? If the couple own other investment properties, what will happen to those? When coming to any sort of agreement in respect of financial matters, it is important to take into account any potential tax liabilities.

The rules…

With effect from 6 April 2023, more favourable tax treatment will apply when assets are transferred between separating spouses or civil partners. Previously, couples could only transfer assets between them on a ‘no gain/no loss’ basis (i.e. with no payment of capital gains tax) up until the end of the tax year in which they separated. They will now be given:

• Up to three years after the end of the tax year of separation, to make no gain/no loss transfers (or the date they divorce if this is earlier): or
• Unlimited time to transfer assets when that transfer is subject to a formal divorce agreement or court order.

This gives separating couples valuable time to consider the tax implications of any split of assets.

The new legislation also includes changes to how the CGT is calculated on the sale of the former marital home, when one person moves out following separation. If the transfer of the family home happens within the three years ‘no gain/no loss’ window, any resulting gain will be free of CGT, as with any other asset. However, there may be instances where an agreement is made for the departing spouse to receive a share of the house proceeds many years later when the property is eventually sold. In that case, the departing spouse will now have the option to claim Private Residence Relief (PRR) on their full share of the gain, unaffected by the fact they did not live in the property for some time. However, the benefit of doing so will be dependent on individual circumstances and any potential CGT arising on any other property which has been acquired will need to be factored into the equation.

Some examples…

To see how the tax rules may apply to you;

Example 1 – Alex and Jamie separate in March 2023. Before the new rules were introduced, the couple would have only had until 5 April 2023 to transfer any assets between them without triggering a potential tax liability. It is unlikely that they would have had time to consider and implicate this and therefore CGT would be due on the eventual sale or transfer of any assets.

Under the new rules, they would have until 5 April 2026 to transfer assets free of CGT (earlier if divorce is granted before this date) giving a greater degree of flexibility in terms of timings.

Example 2 – Alex and Jamie from example 1 owned a joint property – the family home - which they lived in together until March 2023, when Jamie moved out. It is agreed that Alex will continue to live in the family home until their two children are 18 (say in 2035), at which point the property will be sold and Jamie will receive 50% of the sale proceeds.

Under the new rules, Jamie will now have the option to claim PRR on the deferred proceeds, despite the fact he did not live in the property between 2023 and 2035. However, Jamie will have to weigh up whether this is the most tax efficient option if he has purchased another property during this time, as only one property can be classed as his main residence for PRR purposes. This may be difficult to determine, and a degree of educated guesswork will be required as to what any future gain on the new property may be.

So, in most cases there is likely to be no capital gains tax payable by spouses upon the transfer of assets between them, so long as this is done timeously. Careful planning will need to be done to ensure a fair split of assets, giving consideration to potential future CGT liabilities.

It is important to take legal advice before agreeing the financial matters following upon your separation, including on what the tax implications and reporting requirements are.

Get in touch with Nilah or Laura for further advice tailored to your circumstances.

Related News, Insights & Events