Capital Gains Tax Changes

Changes to the Capital Gains Tax regime will come into effect from 6 April 2023. These will apply when separating or divorcing couples need to sell or transfer properties or other assets.

If you are transferring ownership of a property or asset to your spouse or civil partner following separation or within divorce proceedings, you should be aware that you may have a potential Capital Gains Tax (CGT) liability. This should therefore be considered as part of any financial settlement.

Changes to the length of time post-separation when CGT applies

CGT is payable on the increase in value of an asset between purchase (base cost) and its sale or disposal. Transfers of assets between spouses take place on a “no gain no loss” basis for CGT purposes. This means that no CGT is imposed on the transfer between spouses, with the receiving spouse effectively taking the other spouse’s base cost. However, this rule for spouses only applies up until the end of the tax year of permanent separation. 

New CGT rules will apply from April 2023 which extend the no gain no loss rule to separating spouses or civil partners. These new rules will mean that there will be no CGT to pay on any transfer which takes place within three tax years following the end of the tax year of separation or at any time as part of a formal financial settlement within divorce proceedings or dissolution of civil partnership. This should then provide separating couples with more time and flexibility to resolve their financial arrangements.

Changes to Private Residence Relief

If you sell your only or main residence, any gain is generally exempt from CGT due to a relief called private residence relief (PRR). You are entitled to full PRR relief when you sell or dispose of an interest in the family home if:- 

• The property you are selling or disposing of is your only home.
• You have lived in the property as your main home for all the time you have owned it.
• You have not used a part of the home exclusively for business purposes.
• The grounds and all the buildings have a total size of less than 5,000 square meters.
• The property wasn’t purchased solely to make a gain.

If your sale or disposal of your interest meets all of these criteria, then PRR will be awarded automatically, and there will be no tax to pay. If one or more of them do not apply, they may be liable for partial CGT. A spouse or civil partner who remains in the family home after divorce or separation can claim PRR which results in a zero gain or loss on a sale or transfer of the property for the purpose of CGT. Under current law, the person who has left the family home can only claim PRR on the sale or transfer of the family home if such a sale or transfer takes place within nine months of them leaving. 

Under the new legislation, the non-occupying spouse or civil partner will be given the option to claim PRR on the sale or transfer of the family home when it is sold even if this is more than nine months after they leave. The non-occupying spouse or civil partner will have to decide whether to elect to keep their former matrimonial home as their principal residence and claim relief on it or elect for their new residence to be their principal residence instead.

Changes to CGT where there is a deferred interest in the family home

Where a financial settlement results in the transfer of a property to a spouse with the other receiving a percentage of the proceeds when that home is eventually sold, this is registered as a charge against the title to the home (like a mortgage). Currently, when the release of the charge is triggered on the sale or transfer of the property, CGT will be payable on any gain. Under the new legislation, the person receiving the deferred percentage of the proceeds will be able to apply the same tax treatment to those proceeds that applied when they transferred their original interest in the home to their ex-spouse or civil partner.

Can we help you?

When dealing with financial matters in divorce or separation, it is always advisable to consult a solicitor to protect your interests and to ensure that any settlement considers any tax implications. Our specialist team of family law solicitors can provide legal advice and professional guidance on divorce and financial settlements. We will work alongside a team of expert accountants to ensure that we are able to provide you with the best outcome and that you have complete advice on any tax consequences of your settlement.

DISCLAIMER: Please note that expert tax advice should always be obtained on potential CGT liability when parties have assets or properties which are intended to be sold or transferred within a divorce or dissolution of a civil partnership. This article provides general advice on the changes to legislation relating to CGT which will take effect from April 2023 but should not be relied upon as formal legal or taxation advice.