Changes to Capital Gains Tax treatment upon divorce

From 6 April 2023 the rules surrounding Capital Gains Tax (CGT) treatment upon divorce are changing.

It is important to understand how these changes may affect your client’s financial settlement on divorce or dissolution of a civil partnership, and whether they will benefit from the changes. These tax rules can be complicated and we strongly recommend that they obtain expert advice.

Current Capital Gains Tax rules

• “No gain no loss period”. Transfers between spouses taking place during the tax year of separation (i.e. the year your client ceases living with their spouse as a couple) are not subject to an immediate charge to CGT. For example, if your client separated in May 2021 there would be no immediate charge to CGT on transfers made between them and their spouse during the period up to 05 April 2022. However, this CGT charge does not disappear; the receiving spouse will have to pay any deferred CGT charge. Transfers between spouses taking place after the tax year of separation are immediately chargeable to CGT, with the tax liability needing to be paid within 60 days of the transfer (if property).
• Private Principal Residence (PPR) relief. PPR relief exempts a gain which would otherwise be payable. If one spouse leaves the family home, they may still benefit from PPR relief if the property is transferred to the other spouse. Certain conditions must be met, including: that the other spouse continues to reside in the family home, the departing spouse does not elect for another property to be treated as their main residence, and the departing spouse makes a specific election for PPR to apply to the family home. Currently PPR relief is not available in full if the property is sold to a third party and the departing spouse has left the family home for a period exceeding nine months.

New Capital Gains Tax rules from 06 April 2023

• Extension to “no gain no loss” period. Transfers between spouses will not be subject to an immediate charge to CGT if they take place:
  • up to three tax years following the tax year of separation; or
  • at any time in accordance with a formal agreement or order for finances (e.g. a consent order or order in financial remedy proceedings).

This applies to all capital assets including properties, shares and land. As with the previous rules, the CGT charge does not disappear and the receiving spouse will be responsible for paying the CGT on future sale or transfer of the asset.

• Extension of PPR relief. If one spouse leaves the former matrimonial home, they may still benefit from PPR relief if the property is sold to a third party or subject to a deferred sale agreement. The same conditions apply, including that the other spouse continues to reside in the family home, the departing spouse does not elect for another property to be treated as their main residence and the departing spouse makes a specific election for PPR to apply to the family home.

How will the changes affect your clients?

• More time. Your clients will have more time following separation to transfer assets without triggering a CGT charge – up to three years following the tax year of separation or at any time as part of a formal divorce agreement.
• More space. Your clients may still benefit from PPR relief if they have left the former matrimonial home and it is subsequently sold to a third party.
• More flexibility. Your clients may still benefit from PPR relief if the former matrimonial home is sold following a deferred sale agreement

Contact a divorce financial settlement specialist

For more information about how the upcoming CGT changes may affect your clients’ financial settlements then please contact a member of our family law team.