Capital Gains Tax on divorce

Capital Gains Tax on divorce

From 6 April 2023 the transfer of assets between spouses and civil partners who are in the process of separating and are no longer living together can benefit from no gain / no loss treatment for a longer period.

Rules from 6 April 2023

For disposals on or after 6 April 2023 the separating spouses or civil partners will be given:

  • Up to 3 years, after the year of separation, to make no gain no loss transfer of assets.
  • Unlimited time to transfer assets when they are subject of a formal divorce agreement.
  • A spouse or civil partner who retains an interest in the former matrimonial home will have the option to claim Private Residence Relief when it is sold.
  • Individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner, and are entitled to receive a percentage of the proceeds when that home is eventually sold, will be able to apply the same tax treatment on the receipt of those proceeds that applied when they transferred their original interest in the home to their ex-spouse or civil partner.

Planning financial settlements tax-efficiently

The extended no gain / no loss treatment provides valuable time for spouses and civil partners in the process of separating to organise their financial affairs without unwelcome Capital Gains Tax (CGT) liabilities, which is positive news.

  • It should be easier to transfer assets without the risk of a “dry tax charge” arising (ie where there are no cash proceeds).
  • It should remove the complexities around establishing the date of disposal for separating couples.
  • It can remove the complications of whether CGT holdover relief is available on a transfer of assets, post the year of permanent separation, between a separating couple.

Complexities for separating couples

Separating couples should consider the tax consequences of their proposed financial settlement where other asset disposals are envisaged, including in the following scenarios:

  • CGT may still arise if cash is required as part of separation so proactive consideration is needed where there are disposals of an asset to a third party, or where it is difficult to agree the future ownership of the asset.
  • The UK no gain no loss rules will not apply where any overseas assets trigger tax issues in the local jurisdiction – so tax could still arise on a transfer of an asset between a couple depending on where it is situated.
  • Proactive planning to make use of the tax reliefs available to both parties can deliver significant financial benefits to both parties on divorce. However, the extension of the no gain no loss provisions means that on a transfer of an asset it is unlikely to be possible to benefit from any CGT reliefs to which the transferor is entitled, ie using capital losses or Business Asset Disposal Relief against the deemed gain that arises because the transferred asset is treated as disposed of at market value. Equally, the recipient acquires the asset at its original acquisition value, so this may trigger a significant tax charge if they later choose to sell it.
  • The rules do not extend to income tax and therefore any dividends or bonuses taken from the family company (often used to fund a settlement) may still trigger liabilities.

Detailed planning still required

In summary, when considering the financial order and the split of assets, it is vital to consider the tax position of the couple in detail as tax can still reduce the total value of the assets to be divided between the parties. In most circumstances it will be important to understand any latent capital gains within the assets to ensure there is an equitable split of value.

For example, husband and wife, own a property portfolio and it has been agreed, upon divorce, the husband will be the sole owner of a property worth £500,0000 which was originally acquired for £100,000 and the wife will be the sole owner of a property worth £500,000 with an acquisition cost of £300,000. If all things remain equal, on a future sale of the properties the husband will have a larger capital gains tax liability due to the lower acquisition cost.

If you have any questions regarding the proposed changes of any tax issue affecting separating couples, please do not hesitate to get in touch with Tim Lynch.