Changes to Capital Gains Tax and Divorce

The Office of Tax Simplification has recommended that the Capital Gains Tax (CGT) rules on a divorce should be relaxed. The government has recently agreed to this, and draft legislation is to be included in the Finance Bill 2022-23, which will affect disposal taking place on or after 6th April 2023.

  • Nickie Antley-Slater
  • August 17th 2022

What are the current Capital Gains Tax rules for divorce?

Currently, couples who are married or in a civil partnership can transfer assets between themselves on a no gain / no loss basis, however on separation, this valuable relief ceases on 5th April in the tax year of separation.

In addition to this, the transfer takes place at market value as the couple will remain connected until the Final Order (previously referred to as the Decree Absolute, before changes to UK Divorce law on 6th April 2022), creating a capital gains tax charge on any gain arising. (A Final Order confirms the end of the marriage following a six-week period after the Conditional Order [previously known as the Decree Nisi] has been granted). 

There is an exception to this, where Principal Private Residence Relief (PPR) can be extended on a transfer of a property to the spouse who continues to occupy the property.

 

Why are the Capital Gains Tax rules for divorce being changed?

The new rules will give couples the time needed to finalise the divorce without the worry of the tax implications.

The new rules will also allow couples who have substantial capital which is not liquid to divorce without the need to sell the assets to fund any capital gains tax liabilities arising.


What are the proposed new Capitals Gains Tax rules?

The draft legislation contains four proposals which would change the rules as follows:

  1. The no gain / no loss rule is to be extended until the third tax year after the couple separate. This will end earlier if the court grants a Final Order. So as an example, if separation takes place on 1st August 2022, the no gain / no loss will apply on all transfers between the couple up to 5th April 2026 unless they divorce prior to this date.
  2. The no gain / no loss rule will apply to all assets transferred without a time limit, provided they are under a formal divorce agreement or court order. Care will need to be taken and advice sought prior to transferring assets, to ensure they meet the requirements to qualify for this relief.
  3. The current PPR exemption may not necessarily be required as the residence can be transferred under the no gain / no loss rules as above. This rule will also be extended so that it applies on the sale of a property to a third party. Therefore, the spouse who no longer occupies the property can claim PPR as if they remained in the property, subject to them not having another PPR at the time.
  4. PPR can be claimed under a deferred sale agreement or order. This is where one spouse transfers their interest in the matrimonial home to the other spouse who remains resident in the property, but they retain a lien (legal claim against property granted by a court to a creditor when a debtor doesn't pay their debts) over their share of any sale proceeds when the property is eventually sold. The PPR claimable will be in the same proportion as applied at the date of the original disposal.

 

Get advice if you are getting a divorce

If you are thinking of getting a divorce or have already started divorce proceedings and unsure of how these changes will impact you, contact our Tax Manager, Nickie Antley-Slater in confidence, who specialises in personal tax advice. You can reach Nickie on 0161 905 1801 in Manchester or 01925 830 830 in Warrington, or you can email nicola@lwaltd.com.