Tax consequences for divorcing couples
19 August 2022
There has been a significant and long overdue update to the tax treatment of divorcing couples.
Current Law on Capital Gains Tax (CGT) and Divorce
Spouses and civil partners can transfer assets such as property, business interests or shares between them without incurring CGT on a ‘no gain, no loss’ basis, meaning that any capital gains or losses from these transfers are deferred until the asset is disposed of (usually sold) by the receiving spouse/civil partner. However, under current rules for separating couples, any transfer of assets will only be on a ‘no gain, no loss’ basis for the remaining time in the tax year of separation. If a couple separated in January 2022, for example, they could only take advantage of the lack of CGT charges until 5 April 2022. After that time, the transfer of assets will incur the normal CGT charges.
Additionally, under the current rules, where one of the spouses has moved out of the family home and their share is disposed of within 9 months of them leaving the property, principal private residence relief will be available for the period between them leaving and the disposal. However, if the property is disposed of more than 9 months after they leave, a CGT may arise.
The proposed changes are as follows:
- Separated couples will be given up to three years to make a “no gain, no loss” transfer of assets between them from the point of separation. This will be the tax year of separation plus the two following tax years.
- If the assets are subject to a formal divorce agreement then the couple will have effectively unlimited time to transfer the assets between them on a no gain, no loss basis.
- A spouse/civil partner who retains an interest in the former matrimonial home will be able to claim “Private Residence Relief” when it is ultimately sold and, therefore, not have to pay any CGT at all.
These changes will greatly help divorcing couples, particularly those whose main asset is their home or where, perhaps, they have a significant property portfolio. They will help alleviate possible tax bills – at a time when the parties’ finances are undergoing an unprecedented squeeze – and ease the pressure of transferring assets hastily. Accordingly, we consider the proposed changes to be very sensible and should be applauded.
Date of Implementation:
These changes will apply to disposals that occur on or after 6 April 2023. Therefore, from 6 April 2023 (if enacted as currently drafted) couples separating in the tax year 2023-2024 will have until 5 April 2027 to transfer assets between them without incurring any immediate tax liability.
Please contact us for further information.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at August 2022.