Capital Gains Tax rules relaxed for separating couples

There are few things in life more stressful and traumatic than going through a divorce or separation. While the divorcing couple are, understandably, focused on things like living arrangements, children, family finances, assets, furniture and even who gets the family pets, the tax consequences of the split are seldom considered, if at all.

While it is nearly always overlooked, Capital Gains Tax (CGT) can have a serious impact on both parties in the event of a divorce or separation. Fortunately, some relief is on the way.

What is CGT and how does it work?

Put simply, CGT is a tax that the government levies on capital gains. A capital gain is the profit a person makes when they sell an asset for more money than it cost to acquire that asset. So, let’s say that a person buys some land for a price of £50,000 and, a year later, they sell that land for £80,000. They have made a capital gain of £30,000 and that will be subject to CGT at a rate of between 10% to 20% depending upon that person’s overall annual income.

But note that liability to CGT does not only arise in circumstances where an asset is sold. If someone acquires an asset and subsequently transfers it to another person as, say, a gift, then the transferor or donor may still be liable to a CGT charge. That is because HMRC will treat the gift as a “notional disposal” at the market price of the asset as at the time of the transfer.

So, taking the example above, you own a parcel of land which you acquired for £50,000. A year later, you decide to gift this land to your partner or a member of your family. The land is worth £80,000. Even though you did not take a penny in return for the gift, you will still have a “notional” gain of £30,000 upon which you will have to pay CGT.

How does this affect divorcing couples?

As the law stands, there is an important exemption to the CGT rules which applies only to married couples’ property, provided they actually live together. The exemption is contained in S58 of the Taxation of Chargeable Gains Act 1992 and it provides that all transfers between spouses are considered as “no gain, no loss” transfers. In other words, they do not give rise to a CGT charge. So, if a married man acquires a parcel of land for £50,000 and then, a year later when it is worth £80,000, transfers the land to his wife, he will not pay any CGT. The transaction is, in effect, tax neutral. A CGT charge will only arise if the wife subsequently sells or otherwise disposes of the land in question.

This arrangement does, however, have its limitations, for example, when a couple are in the throes of a divorce. As a part of the divorce procedure, it is very common for the separating spouses to transfer assets between them and S58 means that the “no gain or no loss exemption” is only available in relation to any disposals in the remainder of the tax year in which the separation happens. After that, transfers are treated as normal disposals for capital gains tax purposes.

This can adversely impact couples going through a divorce or separation in that it places a strict time-compliance limit on the often complex and difficult process of sorting out the marital assets. Any spouse who transfers an asset after this deadline will face a potentially hefty CGT bill on top of all the other costs commonly incurred by marital splits.

Some relief is now on the way

From 6 April 2023, the CGT rules for married couples will be changing, thanks to the recommendations of the Office of Tax Simplification. The new CGT rules on divorce will provide as follows:

• separating spouses will be given up to three years after the year they cease to live together in which to make “no gain or no loss” transfers
• “no gain or no loss” exemption will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce settlement
• a spouse who retains an interest in the former matrimonial home to be given an option to claim Private Residence Relief (PRR) when it is sold (which means no CGT will be payable)
• individuals who have transferred their interest in the former matrimonial home to their ex-spouse will be entitled to receive a percentage of the proceeds when that home is eventually sold and also will be able to apply the same tax treatment to those proceeds that applied when they transferred their original interest in the home to their ex-spouse

It is anticipated that the new CGT rules for divorcing couples will take some pressure off divorcing couples by making settlements fairer and much less likely to result in an unwarranted and unfair tax liability.

Getting the right help

The divorce process is stressful enough in its own right but when valuable assets are involved the problems and pressures are multiplied. Consequently, anyone who wishes to start divorce proceedings, or formally separate, should take advice from experienced divorce lawyers who can alleviate at least some of the stress and help to ensure that outcomes are as fair and equitable as circumstances will permit while limiting the potential financial damage.

For further information and trusted legal advice regarding matters of divorce, get in touch with our Resolution-accredited divorce lawyers in London at Carlsons Solicitors.