What is Capital Gains Tax (CGT)?

Capital gains tax is the tax that you pay on any profit made when disposing of a chargeable asset, such as shares or property, that has increased in value.   Individuals have a CGT allowance of £12,300 a year at present, so if any profit of less than this is made, no CGT is payable.  However, from April 2023, that allowance is set to reduce to £6,000 a year and then again in April 2024, and for subsequent years, to £3,000.

Divorcing couples often incur a CGT liability when property and other assets are dealt with as part of their settlement agreement. Currently, this liability is easily incurred, as only assets transferred within the tax year in which separation occurs are subject to no gain, no loss CGT treatment.  (See below for further information.)

What are the new rules and when will they come into force?

The new rules will mean that separating spouses and civil partners will have more time to transfer assets between themselves without there being a CGT charge.

On all assets transferred between themselves on or after 6 April 2023, separating couples will be allowed up to three years after the tax year in which they stop living together to make a no gain, no loss CGT transfer of assets between themselves.

Furthermore, no gain/no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement, providing the assets are disposed of in accordance with that order.

If a spouse or civil partner retains an interest in the former matrimonial home, they may be able to claim private residence relief (relieving them of any CGT) upon sale.  Also, if they have transferred their interest in the home to their former spouse or civil partner but are entitled to receive a percentage of the proceeds when it is eventually sold, the proceeds will be subject to the same tax obligation as would have applied when the transfer was originally made.

In any of the above situations, we recommend that you obtain advice from an independent accountant or tax specialist as they will be able to advise you fully of your liabilities and what information needs to be provided to HMRC.

What are the current rules?

Presently, if assets are transferred between spouses or civil partners before they separate, they are deemed to have been transferred at the same value as when purchased, so no CGT is payable.  However, if the transfer is made after separation, CGT liability depends on exactly when the transfer is made.  If the transfer is made during the tax year in which the separation occurs (i.e. before 5 April), transfers are made on a no gain, no loss basis.  If the transfer happens after the tax year in which the separation occurs, it is treated as a normal disposal and is subject to capital gains tax in the normal way.

Bradie Pell, partner and head of Graysons’ family team says:

“The new rules are much fairer for separating couples and will make it easier for them to transfer assets without the urgency that can be a cause of stress.  Capital gains tax is a tax that separating couples often take no account of, and it can end up being significant.  Discussing this as early as possible with your legal advisor and independent accountant/tax specialist can certainly make a difference to the outcome of your divorce or dissolution of civil partnership.  We always suggest that independent tax advice is obtained so that parties can be absolutely clear on their tax liabilities and can make an informed decision. It is important to note that the provisions do not apply to partners who are not married or in a civil partnership.”

The above information is not intended to be treated as tax advice and is an overview only.  Please read the government’s own publication regarding capital gains tax transfers between spouses and civil partners for further information.

Author: Bradie Pell, partner and head of Graysons’ family team