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Changes to Capital Gains Tax treatment upon divorce

From 06 April 2023 the rules surrounding Capital Gains Tax (CGT) treatment upon divorce are changing.

It is important to understand how these changes may affect your financial settlement on divorce or dissolution of a civil partnership, and whether you may benefit from the changes. These tax rules can be complicated and we strongly recommend obtaining expert advice.

CGT is a tax charged upon the gain made on the sale or transfer of certain assets, such as residential property or shares, where that asset has increased in value. The current rate of tax varies from 10% to 28%, depending on the type of asset and the individual’s personal tax position.

Current CGT rules

  • “No gain no loss period”. Transfers between spouses taking place during the tax year of separation (i.e. the year you cease living together as a couple) are not subject to an immediate charge to CGT. For example, if you separated in May 2021 then there would be no immediate charge to CGT on transfers made between you and your spouse during the period up to 05 April 2022. However, this CGT charge does not disappear; the receiving spouse will have to pay any deferred CGT charge. Transfers between spouses taking place after the tax year of separation are immediately chargeable to CGT, with the tax liability needing to be paid within 60 days of the transfer.
  • Private Principal Residence (PPR) relief. PPR relief exempts a gain which would otherwise be payable. If one spouse leaves the family home, they may still benefit from PPR relief if the property is transferred to the other spouse. Certain conditions must be met, including: that the other spouse continues to reside in the family home, the departing spouse does not elect for another property to be treated as their main residence, and the departing spouse makes a specific election for PPR to apply to the family home. Currently PPR relief is not available in full if the property is sold to a third party and the departing spouse has left the family home for a period exceeding 9 months.

New CGT rules from 06 April 2023

  • Extension to “no gain no loss” period. Transfers between spouses will not be subject to an immediate charge to CGT if they take place:
    • up to three tax years following the tax year of separation;

or

    • at any time in accordance with a formal agreement or order for finances (e.g. a consent order or order in financial remedy proceedings).

This applies to all capital assets including properties, share and land. As with the previous rules, the CGT charge does not disappear and the receiving spouse will be responsible for paying the CGT on future sale or transfer of the asset.

  • Extension of PPR relief. If one spouse leaves the former matrimonial home, they may still benefit from PPR relief if the property is sold to a third party or subject to a deferred sale agreement. The same conditions apply including that the other spouse continues to reside in the family home, the departing spouse does not elect for another property to be treated as their main residence and the departing spouse makes a specific election for PPR to apply to the family home.

How will the changes affect me?

  • More time. You will have more time following separation to transfer assets without triggering a CGT charge – up to three years following the tax year of separation or at any time as part of a formal divorce agreement.
  • More space. You may still benefit from PPR relief if you have left the former matrimonial home and it is subsequently sold to a third party.
  • More flexibility. You may still benefit from PPR relief if the former matrimonial home is sold following a deferred sale agreement