How do Capital Gains Tax rules affect divorcing couples?

How do Capital Gains Tax rules affect divorcing couples?
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    Disclaimer: This article is based on legislation which was correct at time of publishing on March 27, 2023
    This page was last updated on September 21, 2023

    Capital gains tax (CGT) is complicated at the best of times, and this is even more the case when it comes to divorce, as following separation Capital Gains Tax has been a minefield. However, the position is about to become easier.

    Under proposed new rules, disposals of assets in a divorce will not be subject to capital gains tax. Separating spouses and civil partners will be granted the same tax treatment as married couples – with the receiving party being treated as if they had paid the same amount for the asset as the donor, on a no gain, no loss basis.

    Whilst married couples, and civil partners can transfer assets between themselves without triggering tax charges under current rules, that all changes when the marriage breaks down.

    From 5 April, following the date on which a married couple separates, they can no longer transfer assets between them on a no gain, no loss basis, even if the transfer results from a court order.

    Timing of the separation may not be top of the list of a couple’s priorities in the midst of a split, but when you separate in a tax year can make a massive difference to the tax position.

    If a married couple or civil partners separate on, say, 31 March, they would have 5 days before the end of the tax year to agree on a financial settlement and arrange any paperwork to effect the transfer. Separating just a week later would give almost a full year to the end of that tax year to deal with the financial implications.

    There has been much lobbying for the tax rules to be changed, and draft legislation intended to give a 3-year window for sorting out the financial aspects of dividing up assets was published in the summer of 2022. This has yet to become law but may be included in the forthcoming finance bill.

    What are the new changes to Capital Gains Tax after divorce?

    From April 2023, the proposed rules will mean that separating spouses will have up to three years to transfer assets and benefit from no gain, no loss treatment. The eligibility to claim private residence relief will be further extended.

    The new rules will give couples more time to plan for what will happen to their assets on permanent separation, hopefully helping relieve financial pressure.

    The changes are even more helpful when the former matrimonial home is eventually sold.

    The former matrimonial home has been problematic for many spouses and civil partners, and the rules on who can obtain private residence relief are complex.

    The new rules include an option to claim principal private residence relief on the former matrimonial home when it is retained, so long as the ex-spouse remains in the property.

    Where the party leaving the matrimonial home has invested in a new home, they can choose which of the properties will attract this valuable relief.

    Who is responsible for paying Capital Gains Tax on divorce settlements?

    During financial settlements, disposals of assets are treated as if they were sold at current market value. If the asset’s original cost is less than its current worth, then the transferring spouse will be deemed to have made a capital gain and thus have to pay a capital gains tax liability.

    The liability is the responsibility of the party making the transfer, even if they haven’t received any money from disposing of the assets.

    Can you split CGT with a spouse or civil partner?

    The tax liability remains with the spouse or civil partner making the disposal, but many financial settlements include arrangements for the receiving spouse to pay CGT due on the transfer.

    How long will you have before CGT is applied to capital gains made?

    That depends on the type of asset that has been transferred. For most assets, the tax is payable under Self Assessment, so that the tax is due by 31 January following the end of the tax year.

    Since April 2020, any tax due on the transfer of residential property is to be reported and paid within 60 days of completing the transfer.

    Get help from Butt Miller’s Capital Gain Tax specialists

    Our team of tax advisers are experienced in advising married couples on tax-efficient structuring of their financial affairs. The tax issues on divorce can be complicated, and we aim to help you through the minefield you will find yourself in such circumstances.

    FAQs about Capital Gains Tax on divorcing couples

    Whilst we have hoped to cover the CGT rules during divorce, please read our most frequently asked questions here:

    Do you pay Capital Gains Tax on a house sale after divorce?

    You may not have a tax liability on the matrimonial home, but rental property will likely generate a tax charge.

    A separating couple can claim private residence relief, which will cover any periods during which you lived in a property as your only or main home.

    Where there is more than one jointly owned property and each spouse is expecting to be left with one or more properties in their sole name under the separation agreement, divorcing couples may be able to elect to hold over the gains that would otherwise be chargeable to tax.

    Where the asset is a residential property, any tax payable must be reported to HMRC and paid within 60 days of transferring.

    What about business assets?

    It’s not just houses that are affected. If a married couple is required to divide business assets between them on divorce, there may be a relief which will reduce or eliminate the tax payable on making the transfer.

    Holdover relief on the transfer of business assets will allow you to claim no gain, no loss treatment on the disposal.

    A historical court case had allowed this treatment in all transfers of assets used in a business on divorce. Still, HMRC has changed their guidance on relief in recent years, so you need to seek advice on whether no gain, no loss under holdover relief still applies to you. Thankfully the new rules should also apply to business assets.

    Entrepreneurs’ Relief (now Business Asset Disposal relief) would also be available concerning business assets transferred on divorce if you meet the relevant conditions.

    When do the new Capital Gain tax rules for divorcees start?

    As of February 2023, the draft legislation has yet to be ratified, but the expectation is that the rules relating to the transfer of assets on divorce will change from April 2023. The final legislation is expected to be published in the finance bill this year.

    What happens if you were officially divorced before the new CGT rule applied?

    The new rules are expected to apply to orders to transfer assets dated after 5 April 2023. In most cases, the division of assets is decided before the divorce is finalised, so it is unlikely that divorces taking place before the new tax year will benefit from these new rules.

    Assets transferred due to a divorce agreement before 5 April 2023 will be subject to Capital Gains tax to the extent that no reliefs or exemptions are otherwise available.

    Conclusion

    The tax treatment of transferring assets is complicated and especially so under a formal divorce agreement. Getting help from a tax adviser is as vital for divorcing couples as legal advice.

    Learn more about Capital Gains Tax here:

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