Changes to CGT for Separating & Divorcing couples

The Government has published draft legislation and an accompanying policy paper, Capital Gains Tax: Separation and Divorce, detailing changes to the rules applying to transfers of assets between separating spouses and civil partners. The draft legislation will form part of the Finance Bill 2022-2023, which will likely go before Parliament in early 2023. The impact of the changes will be significant for divorcing couples.

Previously, the Office of Tax Simplification (OTS) recommended that the window for ‘no gain no loss’ transfers be extended to allow separating couples at least two tax years after the separation event to make transfers, or an even longer period provided it is reasonable and in accordance with a financial agreement approved by a court. The draft legislation published in July goes beyond these recommendations.

What is Capital Gains Tax?

CGT is a tax on the profit (gain) when you sell something, for example property (that is not your main home), shares or personal possessions such as art, which has increased in value.

CGT is only payable on gains above your tax-free allowance, which the HMRC refer to as the Annual Exemption Amount.

In addition to the allowances, there are also reliefs available. The main relief of note is the Private Residence Relief (PRR), which allows homeowners to sell their main home without being subject to CGT.

Current Law on Capital Gains Tax and Divorce/Dissolution

Currently, spouses and civil partners have until the end of the tax year in which they separate to transfer assets between them without incurring a charge to CGT. This is known as ‘no gain no loss.’ Therefore, if the assets can be transferred before 5th April, no CGT is payable.

In the vast majority of cases, where negotiations take time or Court hearings need to be listed, for example, this timescale is simply unachievable. Once the tax year of separation ends, the couple, therefore, loses the advantage of the no gain no loss rule, and transfers are considered standard chargeable disposals for CGT purposes. This can result in a significant tax liability to be paid by the transferring party.

The New Proposed Changes

On the 20th July 2022, the Government proposed changes to the current CGT in their draft Finance Bill 2022-23. The proposals are that:

  • Separating spouses or civil partners can transfer assets between themselves at no gain or loss at any time within three years after the year of separation regardless of whether they are still living together or not. The assets transferred must be subject to an Agreement or a Court Order.
  • A spouse or civil partner who separates and moves out of the family home but continues to retain an interest in it will be able to benefit from PRR when the family home is sold later.
  • A spouse or civil partner who transferred their interest in the family home to their ex-spouse or civil partner and are to receive a percentage of the proceeds when the family home is sold will be able to use PPR on those proceeds when received provided they applied when they transferred their original interest in the family home. The deferred charge must have been made in accordance with an Agreement or a Court Order.

What will these changes mean?

  • Separating finances is often a complicated exercise, which requires a delicate balancing act. With the changes, separating couples will no longer having to worry about a potential CGT liability on transfer.
  • The changes will also ensure greater fairness. The old CGT rules could be seen as a tax on divorce, which is unfair given the burden that divorcing parties are already facing and spouses or civil partners leaving the family home are no longer punished with a CGT for doing so.
  • Parties will be under less pressure to finalise their financial settlement within 9 months to avoid the consequence of CGT. Also, if parties are currently engaged in court proceedings they will not be punished if their litigation overruns as it can often take 18 months or more to obtain a final order.
  • If you agree to a defer charge you will not have to worry about a CGT bill later down line. Depending on what has been agreed or ordered in relation to the deferred charge, this could possibly be 5 or even 20 years later when the property is sold and the deferred charge ends.

The policy objective surrounding the new measures is to make the CGT rules fairer for spouses and civil partners who are in the process of separating. Once the new rules are implemented, couples will have more time to transfer assets between themselves without incurring a charge to CGT. Where that transfer is pursuant to a court order, the couple will have an unlimited time to transfer those assets.

It is essential to take proper legal and financial advice when separating or getting divorced. Please contact our Matrimonial Team on 028 90 200050 for more information and guidance.