Capital Gains Tax Changes for Divorcing Couples
The sale or disposal of an asset can attract Capital Gains Tax (CGT) as another unwelcome added expense at the time of divorce. The current rates of CGT are 10%, rising to 20%, although higher rates of 18% and 28% will apply for certain chargeable gains on residential properties, unless private residence relief applies, for example, when after separation, the departing party retains the marital home as their main residence pending the financial settlement.
Marriage or a civil partnership enables parties to transfer assets from one to another without attracting a CGT liability. This benefit exists only until you separate and only within the tax year of separation, i.e., before the following 6 April. Therefore, separating and divorcing couples should plan and think carefully about the division of their assets as early as possible. They should also take both legal and tax advice, in order to minimise the tax consequences of their separation, thus leaving as much cash as possible to enable them to rehouse.
Governmental draft legislation was released on 22 July 2022 to propose changes to the Capital Gains Tax (CGT) position upon divorce. The proposed date of implementation is 6 April 2023.
Current rules for Capital Gains Tax in divorce
Currently, the deadline for married couples to transfer assets at a ‘no gain no loss’ exemption, whereby no tax is due, is the end of the tax year of their separation. Each spouse would acquire ownership of the asset at the original base cost.
At the onset of the new tax year, any transfers between the spouses are conducted at market value. Thus, if a couple have been separated for a period in excess of one year and, for example, the husband transfers his interest in a property to the wife, the husband will be liable to pay Capital Gains Tax on the capital gain on transfer. Essentially, for tax purposes, he will be deemed to have sold the asset to his wife at a price which reflects the market value at the specific time of transfer.
Proposed Changes to Capital Gains Tax on divorce
Proposals to change existing law are:
- To extend the ‘no gain no loss’ principle for the entire period following separation, if the assets are transferred following a court order
- To allow the spouse who vacated the family home to identify that property as their principal private residence and therefore, to benefit from relief on sale
- To provide additional relief for a spouse whose interest in the family home is recorded in the form of a deferred charge over the property
What do the Capital Gains Tax changes mean for divorcing couples?
Divorcing couples will certainly welcome these changes to the current law. The amendments will enable couples the opportunity to transfer assets without incurring an immediate and often significant Capital Gains Tax liability, which can deplete the availability of funds to rehouse.
Family lawyers welcome the new proposals as they consider the current rules to be deeply and unfairly punitive to a party who has left the property, as they are unable to benefit from principal private residence relief.
Assets, which are sold as part of the financial settlement following divorce, would not be affected by the new proposals. In that case, Capital Gains Tax on sale will remain due within 60 days of the sale.
How will these changes affect Capital Gains Tax and divorce?
In summary, the new CGT rules would mean:
- There is no deadline for divorcing parties to transfer assets between themselves in circumstances where the transfer is made following a court order.
- The ‘no gain no loss’ window is extended either to 3 years from the date of separation or for any period if the assets are transferred following a court order.
- Currently, if a party does not sell/transfer their interest in the family home within nine months of their departure, they are liable to pay CGT. The new rules allow them to continue to claim principal private residence relief after the nine month deadline if they divorce.
- Currently, a deferred charge of the former marital home is recognised as a new asset for CGT purposes and this tax is applied when, eventually, the charge is paid. Under the new rules the private principal residence relief can be applied to the deferred charge, thus eliminating the CGT liability.
- If the current proposals are enacted without amendment, then from 6 April 2023 the deadline for a couple separating in 2023-24 to transfer assets without incurring CGT is 5 April 2027 or indefinitely if they divorce.