A welcome change in Capital Gains Tax for divorcing couples

For many couples, the thought of having to pay large tax bills when transferring assets as part of a divorce settlement adds further stress and fear and reduces the overall amount which is available to be split between the parties for the benefit of the family. However, the welcome new changes to reduce this have been announced in the Spring Finance Bill 2023, which will come into force in the new tax year, once Royal Assent has been granted.

What are the current rules?

Under the current rules, any transfers made between a divorcing couple, within the same tax year of separation are made on a no gain no loss basis and therefore will not incur any Capital Gains Tax (CGT). Any transfer made in the new tax year and beyond will then be subject to CGT at the usual rates. This is unfortunate for those who separate towards the end of the current tax year, leaving not very much time to finalise matters to benefit from this. Many separating couples often also find that they do not have everything sorted out within that time frame and therefore, any transfers made after 6 April that year, will then be subject to CGT.

When separating, it is common for one party to move out of the family home, which is jointly owned. There is a tax relief known as principal private residence relief which means that you do not pay capital gains tax on the sale of your main home, regardless of any increase in value since you purchased it. However, when that one party moves out of the family home it is no longer their main residence and for the period they are not living there, this relief will not apply. Therefore, that party who has moved out, then becomes potentially liable for capital gains tax on the any gain in value upon the sale of the family home as it is no longer their principal private residence.

What is going to change?

Following the announcement of the 2023 budget and the Spring Finance Bill 2023, the government have confirmed that the proposals made in August 2022 in relation to a change in the capital gains tax regime on divorce will come into force in the new tax year, one the bill has received Royal Assent. This new law provides separating couples with the following benefits on a no gain no loss basis from the beginning of the new tax year:

  • No capital gains tax liability in the 3 years following the tax year that they stopped living together;
  • Where there is a formal divorce agreement, there is an unlimited time period for transfers between the parties;
  • A spouse who retains an interest in the family home, but no longer lives there, will be given an option to claim principal private residence relief when it is sold;
  • For those who have transferred their interest in the family home to the ex-spouse but are entitled to sale proceeds upon its sale, they will be able to apply the same tax treatment to those proceeds that applied when they transferred their original interest in the home.

What does this mean for divorcing couples?

For those couples still living together, who have separated and are going through or thinking of going through the divorce process, these new rules give you much more time to sort out your financial arrangements without the need to factor in paying any large capital gains tax bills. If you finalise your finances by way of a consent order which has been agreed either between you, your solicitors, through mediation or by other means or a final order through financial proceedings, you will have unlimited time to divide and transfer assets without the need to factor in CGT.

This relief will continue to apply to those who transfer the family home to one spouse with the agreement that it is then to be sold at some date in the future and the transferring spouse is to receive a share of the sale proceeds. This sale will be dealt with using the same tax rules which applied on the initial transfer meaning that at that time, that spouse can choose to claim principal private residence relief, despite any gain in value since the transfer.

All transfers will continue to be on a no gain no loss basis. This means that the person receiving the asset will receive it at the same price which it was purchased for. Therefore, if and when they decide to sell it in the future, they will then be taxed on the full gain at that time. At this stage, it will no longer be a part of the divorce or separation and instead is a personal choice to do so.

This new law is a welcome change to those separating as it relieves the added pressure of having to factor in large CGT bills when considering a transfer of assets between parties meaning there is more funds available for the family moving forwards.

How can Moore Barlow help you?

At Moore Barlow, we have lawyers and mediators qualified in assisting you with the divorce itself as well as with a financial settlement whether this be done by way of agreement, negotiations, mediation, collaborative law or through our new one lawyer one couple model, Accord.

Explore our full range of family and divorce legal services and see how we can help you

We also have our own in-house tax adviser, Alex Wavell, who will be able to provide bespoke advice as to any tax implications arising from your agreement.

Our lawyers at Moore Barlow also work closely with many financial advisers and accountants who we can recommend to assist you whilst going through your divorce and also into the future.

If you would like further information, please do not hesitate to contact one of the team who would be pleased to assist you.