New Capital Gains Tax Rules for Divorcing and Separating Couples

When a couple divorces or separates, the transfer of the matrimonial home and other properties as between them may trigger a capital gains tax (“CGT”) liability.

No CGT is charged on a transfer of assets between spouses or civil partners who live together, but this tax relief did not apply if the spouses or civil partners divorced or separated.

However, the Government has sought to change this. As part of the Government’s Spring Budget, delivered on 15 March 2023, it was announced that the Finance Bill 2023 would contain legislation extending the period of time separating and divorcing spouses and civil partners have to benefit from the CGT relief on transfers of assets between them.

It is hoped that this will improve fairness and introduce a more practical system.

Previous rules

The previous rules varied depending upon whether the spouses or civil partners remained living together in a relationship or had separated or divorced:

• Living together: whilst spouses or civil partners remain together, any transfers of assets between them will be made on a “no gain, no loss” basis. This means that any gains or losses from the transfer are deferred until the asset is disposed of by the receiving spouse. The receiving spouse will also be treated as having obtained the asset at the original cost (e.g. the price the transferring spouse paid for the asset, sometimes many years prior).
• Separated or divorced: once spouses or civil partners separated, the “no gain, no loss” treatment was only available for the remainder of the tax year in which the separation happened. After this period passed, the transfers were treated as normal disposals for CGT purposes.

The practical reality of this was such that spouses or civil partners separating in March, for example, might have found themselves with only a few weeks to arrange their affairs without incurring a potential CGT liability. This was likely to be near impossible to achieve, particularly where there were a number of assets involved or the spouses or civil partners were awaiting court orders.

New rules

The rules for spouses and civil partners living together remain as previously.

The Government has extended the “no gain, no loss” treatment where there is a transfer of assets between spouses or civil partners who are in the process of separating. From 6 April 2023, the periods are:

• for up to three years after the year in which the couple cease to live together as spouses or civil partners; and
• for an unlimited period where the transfer occurs as part of a formal divorce agreement.

This is undoubtedly a more sensible approach, which can enable spouses or civil partners engaged in divorce proceedings or with complicated shared assets more time to reach a formal divorce settlement without having to bring into the equation potential CGT liabilities for the transferring individual.

The matrimonial home

When spouses or civil partners separate and the matrimonial home is sold, this can also have CGT consequences.

In the ordinary course, if spouses or civil partners sold their matrimonial home, it is likely that they would benefit from Principal Private Residence relief (“PPR”) in order to mitigate any CGT liability (provided they had occupied it as their primary home for their entire period of ownership).

However, when spouses or civil partners separate, it is often necessarily the case that one party has to move out of the matrimonial home. This can expose the leaving spouse to a potential CGT liability on the eventual sale of the matrimonial home, as their “occupation” (for PPR) and “ownership” periods will be misaligned. This liability can in certain cases be significant where, for example, the leaving spouse retains an interest in the property whilst the other party remains in the property for an extended period. The leaving spouse would have an interest in the eventual proceeds of sale, which might occur some years into the future when the property might have appreciated in value (for example, should the agreement be that they sell when the children reach a certain age).

For any disposals or transfers from 6 April 2023, the leaving spouse is allowed to elect how their PPR is appointed between their former matrimonial home and any other home they might have acquired since leaving the matrimonial home:

• a spouse or civil partner who retains an interest in the matrimonial home now has the option to claim PPR on it when it is sold (provided they do not claim PPR on any other property for that same period);
• where the leaving spouse or civil partner transferred their interest to their ex-spouse or civil partner but retained the right to receive a percentage of the proceeds when the home is sold, they are able to apply the same tax treatment to those proceeds when they are received, that applied when they transferred their original interest in the home to the ex-spouse or civil partner (e.g. any reliefs that applied at the date they transferred their interest will apply on the eventual sale).

How we can help

In light of this change of law, separating spouses and civil partners may wish to take advice regarding their potential CGT exposure and how best to manage their tax exposure on transferring matrimonial assets.

CGT liabilities on separation can be complicated and time consuming, particularly where there are multiple properties, overseas assets or other potential CGT reliefs to be considered. Many individuals find that taking early advice can assist with reaching a financial settlement efficiently and, in some cases, leave both parties financially better off.

If you would like assistance with your CGT tax planning, or have any queries about this topic, please contact Eva Moynihan or any member of the Private Client team.

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