Changes to capital gains tax on separation and divorce

The government has announced changes to the capital gains regime that applies when separating or divorcing couples need to transfer assets between themselves.

What are the current rules?

Under current rules, spouses and civil partners need to be mindful of the risk of unexpected tax bills which can influence the outcome of the financial settlement.

Transfer of assets between spouses takes place on a ‘no gain, no loss’ basis for capital gains tax purposes. This means that no tax is crystallised on the transfer, with the receiving spouse effectively taking the other spouse’s base cost. However, this special rule for spouses only applies up to the end of the tax year of permanent separation.

What changes are being made?

Under the new legislation, transfers of assets between ex-spouses on or after 6 April 2023 will fall under a more helpful tax regime.

The usual spouse treatment will be available for:

• Up to 3 tax years after the end of the tax-year of separation

• An unlimited time when the assets are transferred as part of a formal divorce agreement

This will provide divorcing couples with more time and flexibility to arrange their financial affairs under the settlement.

Are there any other changes?

Other changes were also announced, improving the capital gains tax position in respect of the family home.

Under current rules, additional private residence relief (PRR) is available when the departing spouse transfers their interest in the matrimonial home to the remaining spouse. From 6 April 2023, this additional PRR will now be available on sale to a third party assuming the specific conditions are met. Consideration will still need to be given to the most beneficial position for the departing spouse particularly where a further residence has been acquired.

Individuals are able to transfer their interest in the former matrimonial home to their ex-spouse in return for a percentage of the proceeds on eventual sale (a ‘deferred charge’). PRR will also apply to those future proceeds on the same basis as it did on the original transfer. Under the current rules, the deferred charge is treated as an asset in its own right, with the growth in value from transfer of the property to ultimate sale subject to capital gains tax.

What will the impact of these changes be?

While these changes will help alleviate the degree of inflexibility under the previous system, it does not mean capital gains tax no longer needs to be considered as part of the divorce proceedings. As noted, the spouse rules work on a ‘no gain, no loss’ basis; it does not extinguish the inherent gain within the asset. In order to understand the real value of their settlement under the divorce, the spouses will therefore need to understand the ‘net of tax’ position.

Evelyn Partners can support individuals and their legal teams in gaining this insight and on ways that tax liabilities could be mitigated both in the financial settlement and over the longer term.

Speak to Evelyn Partners

To find out more, contact Charlotte Fairhurst, Business Development Director at Evelyn Partners Investment Management Services Limited.

Call 07442 981 982 or email charlotte.fairhurst@evelyn.com.

Important information

This article is solely for professional advisers and should not be construed as investment advice. Whilst considerable care has been taken to ensure the information contained within this commentary is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information. Prevailing tax rates and reliefs depend on individual circumstances and are subject to change.

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