On 6 April 2023 significant changes were made to Capital Gains Tax rules for divorcing couples. If you are in, or are facing, this situation it’s important to understand what impact these updates could have. Peter Webb, our Head of Tax Advisory, takes a look at the new rules.
Let’s start at the beginning, and revisit how Capital Gains Tax (CGT) works. Simply put, CGT is the bill you pay when selling or disposing of certain assets and is generally charged on the increase in value since you acquired those assets. The rates are different from Income Tax, and link to the amount of taxable income you receive during the tax year. For residential property the rates currently stand at 18% and 28%, and for other assets the rates are 10% and 20%.
What were the rules before 6 April 2023?
Before 6 April, any assets transferred between spouses during the tax year when separation took place (the year you stopped living together as a couple) didn’t attract CGT. The spouse who received the asset also inherited its original cost, with the full CGT charge deferred until it was later sold or disposed of. This system – known as the “no gain/no loss” transfer – was well understood. However, any transfers between spouses taking place after the tax year of separation immediately fell into the CGT net.
Did this apply to property?
When a married couple or civil partners separated the family home then ceased to be the main residence of the spouse who stopped living there. If the home was then sold in the future this individual would have a period of ownership that would not be exempt from CGT, even if they’d transferred ownership of their share, and in addition Main Residence Relief wouldn’t apply given they didn’t live in the property. This left the departing spouse in a rather unfair position. Only one caveat was of use in this situation – CGT didn’t apply to the last nine months of ownership, so it was only if the family home was sold or transferred in this timeframe that CGT wouldn’t apply.
What are the new rules?
The period during which separating couples can transfer assets between themselves without a CGT bill has now been extended for up to three years following the tax year of separation. The rules apply to all assets including properties and investments. As before, any CGT charge is deferred until the receiving spouse later disposes of the asset.
Main Residence Relief is also extended. So, if a couple who are separating sell their former family home, the spouse who is leaving may still be able to benefit from this relief, but only if the remaining spouse continues living in the home. The departing spouse must choose for the home to be treated as their main or only residence, and no other property can benefit.
These changes are a welcome reform of complex, and rather unfair, CGT rules that apply at an already difficult family time. There’s now more time to share assets following a separation without incurring CGT. In addition, it may be possible for a future sale of the family home to benefit from Main Residence Relief, for both the spouse who continues to live in the property and the one who has left.
As with most UK tax matters the rules can be complicated and you should seek expert advice to make sure you have understood the regulations. If you are facing divorce and need to consider how to split your assets tax advantageously, please contact your nearest office.