Introduction to CGT on divorce and separation

Capital Gains Tax (CGT) can arise on the sale or other disposal of an asset if the asset is sold (or in some cases, has a market value) that is higher than the original cost of the asset plus any enhancement expenditure and disposal costs. The current rates of CGT are 10%, to the extent that any income tax basic rate band is available, and then 20%. Higher rates of 18% and 28% apply for certain chargeable gains on residential properties with the exception of any element that qualifies for private residence relief.

If you are married or in a civil partnership, you can transfer assets from one to another without any CGT until you separate and then under the current rules the transfer between one spouse and the other is only free from CGT for transfers that occur in the tax year in which the separation occurs, i.e., before the following 6 April.

Is CGT payable on a divorce?

Once the capital gains tax exemption for married couples is no longer available, transfers between the couple may be deemed to take place at market value which may give rise to a liability to capital gains tax on the spouse disposing of the property, or a share in it (subject to any available exemptions such as main residence relief).

For capital gains tax divorce, separating and divorcing couples should therefore think carefully about and plan the split of their assets as early as possible and take legal and tax advice to minimise the tax cost of their separation and leave as much value as possible to share between them.

What does the relaxation of Capital Gains Tax (CGT) rules mean for separating and divorcing couples?

For disposals of assets from one to the other on or after 6 April 2023, the Government has stated that legislation will be introduced in Finance Bill 2022-23 to extend the ‘no gain no loss’ window on separation to the later of:

• The end of the tax year which is three years after the separation occurs; and
• Any reasonable time set for the transfer of assets in accordance with a financial
  the agreement approved by a court or equivalent processes in Scotland

What are the proposed changes?

The changes to the CGT rules on divorce and separation are:

• separating spouses or civil partners will be given up to three years after the year they cease to live together in which to make no gain or no loss transfers
• no gain or no loss treatment will also apply without a time limit to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement.
• a spouse or civil partner who retains an interest in the former matrimonial home will be given the option to claim Private Residence Relief (PRR) when it is sold
• 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 receiving that, were applied when they transferred their original interest in the home to their ex-spouse or civil partner

When are the changes to CGT on divorce and separation due to come in?

The changes will apply to transfers of assets on or after 6 April 2023. Remember that for CGT the transfer is treated as having occurred at the time of the agreement (or if conditional, when the condition is met) and not if later, the time of the transfer or conveyance.

What are the qualifying conditions of Private Residence Relief?

Currently, if one spouse remains in a jointly-owned home and the other moves out and later on the home is sold, the share of the sale proceeds belonging to the spouse who stayed will remain free of CGT as it was their main home. Any capital gain on the other spouse’s share may be liable to CGT, but if the home is sold within 9 months of them moving out, then the exemption from CGT for their main residence will apply to the period of absence but after that, a proportion of the spouse’s gain may be liable to CGT.

However, relief is available where, in connection with a separation or divorce or dissolution of a civil partnership, the
leaving the spouse or civil partner transfer their share of the jointly owned property to the remaining spouse or civil partner before the property is sold.

This relief is only available if the leaving spouse makes the transfer more than 9 months after leaving the property and:

(a) it continues to be the other spouse’s only or main residence;
(b) the transfer takes place under a Consent Order and a claim is submitted to HMRC within 2 years of the Order being made; and
(c) the leaving spouse has not elected a new “principal private residence” since leaving.

If these conditions are met, the leaving spouse or civil partner will still obtain private residence relief from CGT for the period from his or her moving out to the point of transfer.

These rules will be tweaked for transfers on or after 6 April 2023 so that:

• a spouse or civil partner who retains an interest in the former matrimonial home to be given an option to claim Private Residence Relief when it is sold
• 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 receiving that, applied when they transferred their original interest in the home to their ex-spouse or civil partner

Conclusion

These changes will make the Capital Gains Tax rules that apply to spouses and civil partners who are in the process of separating much fairer. Making the CGT exemption reliant on a transfer occurring only within the tax year of separation has proved to be increasingly unfair as couples’ financial affairs become ever more complex and some divorces take longer to complete. The changes will give couples more time to plan and transfer assets between themselves without incurring a charge to Capital Gains Tax.

If you or your clients are facing a divorce or separation contact Patrick Cannon to ensure that the CGT and stamp duty exemptions on divorce, separation or dissolution of a civil partnership are fully taken into account and any relief is claimed. SDLT on divorce and the transfer of assets is explained here.