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 after that event, the transfer between one spouse and the other is only free from CGT for transfers that occur on or before the earlier of (1) their divorce order or judicial separation and (2) the last day of the third tax year after the tax year in which they ceased to live together, i.e., before the 6 April in the third year from the year ending 5 April in which they separated.. 

However, once the assets are the subject of a formal separation agreement or divorce order you have an unlimited time in which to make a no gain/no loss transfer to your former partner. 

Is CGT payable on a divorce?

If 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?

A property can be transferred from one spouse to another free of any capital gains tax if they are not separated. If they have separated, then for disposals of assets from one to the other on or after 6 April 2023, the capital gains tax exemption is available until the end of the third tax year after the tax year in which they separated (or if earlier, the date of their divorce or separation order).

However, once the assets are the subject of a formal separation agreement or divorce order the couple have an unlimited time in which to make a no gain/no loss transfer to the former partner.

What are the 2023 Capital Gains Tax (CGT) changes on Divorce and Separation?

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

• Separating spouses or civil partners have been 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 loss treatment also applies 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 has been 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 are able to apply the same tax treatment to those proceeds when received that was applied when they transferred their original interest in the home to their ex-spouse or civil partner.

What are the qualifying conditions of Private Residence Relief?

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.

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

The changes 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 to 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.

Can CGT be avoided in a divorce or separation?

However, where one spouse ceases to live with their spouse in their only or main residence and subsequently disposes of their interest in the dwelling house to someone else and (1) that disposal is pursuant to an agreement for separation or the dissolution of the marriage or a matrimonial court order where (2) in the period between the spouse leaving the matrimonial home and the disposal, the dwelling continues to be the only or main residence of the remaining spouse and (3) the departing spouse has not claimed main residence relief on another dwelling house during that period, any gain arising on that disposal attracts main residence relief. (section 225B TCGA 1992).

This treatment only applies if the departing spouse makes a claim to HMRC. The departing spouse should consider their position carefully before claiming because in some cases it may be to their advantage to claim main residence relief on their new dwelling house.

Relief is also available where the leaving spouse transfers their share of the jointly owned matrimonial property to the remaining spouse, and that “initial disposal” is in accordance with a deferred sale agreement. When the remaining spouse eventually sells the property and pays the leaving spouse their share of the profit on the sale, that payment is treated as a gain attributable to the initial disposal but accruing when received.

This means that eventual receipt of the share of profit by the leaving spouse qualifies for CGT private residence relief in the same proportion that relief applied to the original disposal by the leaving spouse to the former spouse or, where the original disposal qualified for no gain/no loss treatment, in the same proportion that private residence relief would have applied but for the no gain/no loss treatment. (section 225BA TCGA 1993).

Conclusion

The 2023 changes made 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 was increasingly unfair as couples’ financial affairs became ever more complex, and some divorces took longer to complete. The changes 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.

Last Updated: 24 November 2023 to include the changes in section 41 Finance (No 2) Act 2023 to sections 58 and 225B, and insertion of section 225BA into TCGA 1992.