Capital Gains Tax (CGT) changes for separating couples

Proposed changes to the rules around Capital Gains Tax for couples separating or going through divorce were due to come into force on 6 April 2023. Sarah Evans Head of the family team looks at the issue in more detail…

In November 2021, the government accepted proposals from the Office of Tax Simplification (OTS) to change the ‘no gain or no loss’ rule for couples who were separating or going through a divorce when it comes to Capital Gains Tax (CGT).

These changes were outlined in the Finance Bill 2022/23 and were due to come into force on 6 April 2023, however, it appears that there has been a delay in the implementation of these new rules and, as yet the timing for their introduction has not been determined.

The idea behind the new proposals, in relation to Capital Gains Tax, is to give couples more time and take the pressure off reaching financial agreements, especially when there are other complex matters at stake.

In my experience as a divorce lawyer, this can only be a good thing and we welcome the move – it allows couples to spend more time on considering their divorce, rather than the implications of Capital Gains Tax.

What are the current Capital Gains Tax rules for separating couples?

Under the current ‘no gain or no loss’ rule, a couple do not have to pay Capital Gains Tax on the transfer of assets between them if the transfer is made within the same tax year as separation. Any gain or loss is deferred until after the asset is disposed of by the receiving spouse.

While they don’t have to immediately pay CGT, the main issue here is that the window can be very limited – for example, if a couple separate in the December, they can only transfer assets between them and are not liable to pay CGT by the 5^th of April the following year.

If, however, the transfer occurs after the tax year in which the spouses separated, then it is treated as a normal disposal and Capital Gains Tax must be paid in the normal way. This happens quite often where the divorce settlement is made, but the transfer of assets takes place many months after they separate, meaning CGT is then payable.

What are the proposed changes for CGT for separating couples?

The new changes extend the timeframe – it gives separating couples more time to consider their settlement – the ‘no gain or no loss’ rule is extended to three years from when the spouses cease to live together.

The rule will also now apply to assets transferred between spouses as part of a formal divorce agreement without time restrictions.

Also under the current rules, if you leave the family home after a few months, you can no longer claim this is your Principal Private Residence. Under the new rules, if you retain an interest in that family home, you will be given an option to claim Private Residence Relief (PRR) when it is sold.

In cases where one spouse transfers the property to the other spouse but retains a right to receive a percentage of the proceeds when the property is sold (known as Mesher Orders), they would be able to apply the ‘no gain, no loss’ rule when the property is eventually sold as would have applied when the interest was transferred.

Welcoming the move

At Coodes, we certainly welcome the move to change the timeframe around the ‘no gain or no loss’ rule. It gives separating couples much more time to consider the resolution of their financial affairs and is one less thing for people to worry about during what is often a very stressful time for everyone concerned.

The new changes provide a more simplified process and take the pressure off couples who are separating from each other, it gives them an extended period of time to focus on other matters during the breakdown of a marriage. You could argue that the separation or divorce may be less confrontational as a result.

From a divorce lawyer’s perspective, the key benefit is having more time to negotiate, and fewer people will have to pay Capital Gains Tax at the time of transfer within these proceedings – ultimately you are not reducing the pot at a difficult time, where every penny counts.

Get professional advice

It is important that separating couples get appropriate legal advice when it comes to complex financial matters including the implications of Capital Gains Tax.

As specialist divorce lawyers, Coodes has many years of experience in dealing with matters concerning separating couples and we would recommend getting advice at the earliest opportunity.

We would always suggest that, from a financial point of view, you speak to your accountant to get a better understanding of how the new CGT rules could impact on your personal situation.

For more help and advice, please contact a member of the family team at Coodes who will be happy to discuss your personal circumstances in more detail. Call us on 0800 328 3282 or use our Contact Us form and a member of the team will be in touch.