Capital Gains Tax on Divorce

Money is frequently high on the list of things that people worry about when they are considering bringing an unhappy marriage to an end. Tax is usually less so. It is often not until people seek legal or financial advice that they realise that the timing of divorce and splitting of assets can currently have important Capital Gains Tax (CGT) consequences, depending on the asset.  The good news is that the government has just announced a measure which will improve the situation for many.

The family home, additional properties, or other investment assets could all be affected by the CGT rules depending on their value when they were purchased and their value at the time they change hands as part of the divorce.

At present, if an asset is transferred between spouses/civil partners in the tax year of separation, there may be no tax liability. So, for example, this might afford those separating in June time to reach an agreement before the end of the tax year the following April. Meanwhile, those separating in February might feel they ought to try to reach a settlement by 5 April in the same year, in order to save tax.

This can put a lot of pressure on spouses/partners, when there may be a lot to consider, such as re-housing options and pension claims, all of which can take time to investigate and negotiate.

Deferred sales can also pose a problem. In some cases, spouses/partners may agree that the family home will not be sold until the children have finished school, and so one spouse must live elsewhere and wait for their share of the capital. Waiting for this share can also have tax consequences because the spouse/partner who is not living there, is not able to claim the family home tax exemption that the other will be able to.

This problem has been recognised by the government and positive new measures come into force with effect from 6 April 2023:

• Separating spouses/partners will have up to three years to make ‘no gain, no loss’ transfers between themselves and if the assets are the subject of a formal divorce agreement, then they will have unlimited time to make the transfer without tax consequences.
• Those who have retained a legal interest in the family home, but not lived there, or transferred the family home into their ex-spouse/partner’s name and then receive a share of the sale proceeds in the future, will benefit from new rules. In particular, they will be able to claim Private Residence Relief (PRR) when the property is sold.

These tax changes will be positive. Working out how to support two separate households can be a struggle, and looming tax consequences are not helpful to careful consideration and negotiation. Combined with the ‘no fault’ divorce system, introduced in April 2022, this should help to make the divorce/dissolution process easier for couples who have reached the end of the road.

As Family Solicitors we specialise in the legal aspects of divorce, and separate financial advice should be sought from local, trusted accountants about the potential tax consequences of ending your marriage or civil partnership. For further queries, find out more about our family team here or call 01945 461456.

This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However, no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek advice specific to your own circumstances.  Fraser Dawbarns LLP are always happy to provide such advice.