CGT rules for divorcing couples

The government is changing the CGT rules for divorcing couples so they no longer need to settle their estates within a year and face capital gains tax bills

This measure makes changes to the CGT rules that apply to transfers of assets between spouses and civil partners who are in the process of separating, which will come into effect from April 2023.

What are the key changes to capital gain tax rules for divorcing couples?

It proposes that separating spouses or civil partners be given up to three years, after the year they cease to live together, to make no gain or no loss transfers of assets; and unlimited time when the assets are the subject of a formal divorce agreement.

Individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold, will be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the home to their ex-spouse or civil partner.

It also introduces some special rules that apply to individuals who have maintained a financial interest in their former family home following separation and that apply when that home is eventually sold.

This means that a spouse or civil partner who retains an interest in the former matrimonial home will be given an option to claim private residence relief (PRR) when it is sold.

This makes the process fairer for those spouses who are separating or divorcing and are in process of distributing assets between themselves.

These changes apply to disposals that occur on or after 6 April 2023.

Vanessa Lee, tax partner at BDO, said: ‘Couples that need to transfer assets between them as they divorce are less likely to face unexpected capital gains tax bill after April 2023 following tax changes announced yesterday.

‘Under current rules, spouses and civil partners are able to transfer assets between them at ‘no gain no loss’ for capital gains tax purpose – but only up to, and including, the tax year of permanent separation. After that, any transfer of assets is subject to capital gains tax with the deemed proceeds being the market value of the asset. This tends to mean by the time of a divorce or dissolution of a civil partnership, capital gains tax liabilities can arise when assets are transferred.

‘The proposals, for disposals on or after 6 April 2023, bring in a much more favourable tax treatment.

‘This provides valuable time for spouses and civil partners in the process of separating to organise their financial affairs without unwelcome tax liabilities – a long overdue change to help families.’

Ami Jack, tax partner at Evelyn Partners, said: ‘Currently, couples have only until the end of the tax year in which they separate to transfer assets without incurring a CGT charge. This has been particularly problematic for those who separate close to the end of the tax year and creates artificial pressure to speed up the division of assets to avoid creating “dry tax charges”.

‘This extension will, for many, reduce the CGT cost of getting divorced and give separating spouses or civil partners a bit more time to sort out their financial affairs in what can be very difficult circumstances.’

HMRC Policy paper, Capital Gains Tax: separation and divorce