Divorcing is never easy – emotionally or financially. But thanks to the changes back in 2023 to the Capital Gains Tax (CGT) rules, couples separating from 6 April 2023 now have more breathing space when splitting assets. Here’s what you need to know about the new, fairer rules for spouses and civil partners who are separating and are no longer living together.
THE OLD RULES: A TIGHT DEADLINE
Under the old CGT rules, couples who were married or in a civil partnership could transfer assets between each other on a ‘nil gain/nil loss’ basis. This meant the acquiring spouse or civil partner took on the asset at the original base cost, and no CGT was due at the time of transfer.
However, this rule only applied until the end of the tax year in which the couple separated. If you separated in March, for example, you had just a few weeks to sort out financial arrangements to utilise ‘nil gain/nil loss’ transfers. After this period, any asset transfers between the couple were treated as market value disposals, potentially triggering a CGT liability for the transferring spouse or civil partner – regardless of whether they received any financial benefit from the transfer.
This short deadline created significant challenges, especially for those separating close to the end of a tax year. It added pressure to an already stressful time and often led to financial inequalities.
THE NEW RULES: WHAT’S CHANGED FROM 6 APRIL 2023?
Sensibly, HMRC implemented four key changes to the CGT rules for couples separating from 6 April 2023:
- Extended Deadline for Tax-Free Transfers: Divorcing couples now have up to three tax years following the year they separate to transfer assets on a nil gain/nil loss basis. However, this period ends earlier if they formally divorce, their marriage or civil partnership is dissolved or annulled, or they separate under a separation order.
- Indefinite Extensions for Formal Agreements: If asset transfers are made as part of a formal divorce or dissolution agreement, the nil gain/nil loss period can be extended indefinitely.
- Enhanced Principle Private Residence Relief (PPR): PPR has been extended to cover situations where an interest in the marital home is retained but later sold rather than transferred to the spouse who remains in the property.
- Relief for Shared Profits on Property Sales: When one spouse or civil partner transfers their share in the marital home to the other but retains a right to a share of the profits from a future sale, PPR can be applied proportionately to their original interest in the property.
HOW THESE CHANGES HELP DIVORCING COUPLES
The new rules provide separating couples with more time to decide how to split their assets without the immediate pressure of potential CGT charges. This extra breathing room reduces financial burdens during a challenging time, making it fairer for everyone involved.
For instance:
- Couples separating close to the end of a tax year are no longer at a disadvantage compared to those separating earlier in the year.
- A spouse or civil partner retaining an interest in the family home won’t be unfairly penalised if the other spouse remains in the property for years post-divorce. This is especially helpful when retaining joint ownership is the only feasible option.
- The changes align with the introduction of no-fault divorces (effective from 6 April 2022), which have increased delays in the Family Courts. Now, couples have more time to navigate these delays without facing additional tax complications.
IMPORTANT POINTS TO KEEP IN MIND
Couples who are divorcing should seek legal and tax advice to minimise any potential tax charges and therefore ensuring the value is fairly shared between both parties.
While these changes are a significant improvement, they only apply to couples who are married or in a civil partnership. Unmarried couples who separate are not eligible for the ‘nil gain/nil loss’ rules and may face different tax considerations.
Need our help with the tax consequences when divorcing or CGT in general? Get in touch with me.
