Changes were introduced in Finance Act 2023 which have changed the Capital Gains Tax (CGT) consequences for divorcing couples when transferring assets between each other as part of a separation.  The welcome changes address the previous tax complexities surrounding the division of assets and allow more time to transfer assets without incurring a possible charge to CGT. 

When is Capital Gains Tax payable?

CGT applies when an individual realises a gain on the sale or disposal of an asset.  In the context of divorce, the division of assets often involves the transfer of asset ownership from one spouse to another.  For example, the transfer of interest in a property from one spouse to the other.  This transfer can crystallise CGT liabilities for the spouse making the transfer. 

Married couples and civil partners living together are entitled to a CGT exemption which is known as the spousal exemption.  This means that spouses can transfer assets between each other on a ‘no gain, no loss’ basis.  Effectively, the original base cost transfers with the asset and this defers the potential CGT liability until the asset is sold or transferred to a third party.  When couples divorce, the position can become more complicated.

Transfer of Assets

Before the rule changes came into force from April 2023, divorcing couples had until the end of the tax year in which they separate to utilise the spousal exemption and transfer any assets as part of the separation.  If transfers were made in a later tax year and a gain was realised (for example, if the market value of the asset at that date were greater than the purchase cost), CGT would be payable by the spouse making the transfer.  The previous rules caused CGT to be an additional burden for separating couples, by adding unwanted time pressure, making an already very difficult and stressful situation even more so.  As an extreme example, a couple that separated on 31 March would have been given just 5 days to transfer assets between each other to avoid an unwanted CGT liability.

From April 2023, all separating spouses now have a maximum of three tax years following the tax year in which they separate to utilise the ‘no gain, no loss’ rule for CGT.  This therefore gives couples significantly more time to work out the financial implications of the divorce and transfer assets.  This means that, in the extreme example above of a couple separating on 31 March, they would now have 3 years and 5 days to transfer the assets and not be subject to an unwanted CGT liability. 

In addition, where assets transferred are subject to the terms of an Order, there is no time limit for the ‘no gain/no loss’ principle to apply.

These changes act as a practical and helpful tool to ensure that a CGT liability will not arise due to financial arrangements made during the process of a divorce. 

The Matrimonial Home

One of the main assets subject to divorce proceedings is likely to be the matrimonial home.  When the matrimonial home is sold, this can also have an impact on the overall CGT position if one spouse ceases to live at the property.  Usually, if spouses sold their matrimonial home, they are likely to benefit from Principal Private Residence (PPR) Relief to cover the liability in full.

However, when spouses separate, it is often the case that one party moves out of the matrimonial home and the other remains.  This can leave the spouse who is moving out of the property with a potential CGT liability on the eventual sale of the home as they no longer occupy the property as their main residence.

From April 2023, the spouse leaving the property can make an election as to how they would like their PPR to be appointed between their former matrimonial home and any new property which they acquire and move into post separation.  This means that, as long as the other spouse remains in the property and an election is in place that they would like PPR to apply to that property, there would be no CGT due on a future sale.  It is, however, worth noting that they would then have a period where their new home is not covered by PPR and therefore CGT could be due on sale of that property instead.  This may need some careful tax planning.

If the leaving spouse transfers their interest in the property to their former spouse, but retains the right to receive a percentage of proceeds on a future sale, they can elect for the tax treatment to match that which would have applied at the time of the transfer. 

The Finance Act of 2023 brought about welcome changes to CGT for separating couples and will hopefully assist in alleviating an element of the financial stress.  Divorce is often both very stressful and expensive.  It is vital to obtain specialist tax advice as early as possible to manage potential tax liabilities and ensure there is an equitable split of value