In 2021, the Office of Tax Simplification recommended that the capital gains tax (‘CGT’) rules on divorce should be relaxed. The Government since then has acknowledged this need for change and introduced new rules in respect of disposals on or after 6 April 2023, for spouses and civil partners in the process of separating and are no longer living together.
Rules prior to 5 April 2023
Couples who are married or in a civil partnership can transfer assets between each other on a nil gain/nil loss basis. This means the acquiring spouse/civil partner acquires the asset at the disposing spouse/civil partner’s original base cost and no CGT is paid by the transferring spouse/civil partner at the time of transfer. When the marriage breaks down and the couple separates, the above nil gain/nil loss rule only applied in the year of separation, i.e., until the following 5 April.
This left very little time for a separating couple to deal with the emotional and practical consequences of the relationship breakdown and to implement any agreement as to the sharing of assets before a tax liability occurred. It could also create inequalities for those couples who separate close to the end of a tax year and therefore more likely to have to pay CGT than those who separated at the start of a tax year. After the tax year of separation, the couple are then connected for CGT until their divorce is finalised. Therefore, any transfer of assets after the year of separation was deemed to be at the market value, this could create a gain for the transferring spouse/civil partner, regardless of whether they receive a financial gain from the transfer.
Rules from 6 April 2023
Sensibly, from 6 April 2023, HMRC implemented four new rule changes:
- Divorcing couples now have up to three tax years from the year in which they have separated to transfer assets at a nil gain/nil loss basis. This ends earlier if they formally divorce, their marriage or civil partnership is dissolved or annulled, or they separate as part of a separation order before the end of the three years.
- The period of three years can be extended, indefinitely, where the transfer is made as part of a formal divorce/dissolution agreement.
- Principle Private residence relief (‘PPR’) has been extended further, where an interest in the marital home is kept but is sold and not just transferred to the spouse who continues to reside there.
- Furthermore, where one spouse/civil partner transfers their share in the marital home to the other, but under an agreement or order, is entitled to receive a share of the profit on the eventual disposal of the property. PPR is available to be extended in the same proportion that the relief applied on the original disposal to the former spouse.
The changes have made the CGT rules fairer for spouses and civil partners who are separating as they allow divorcing couples to take more time when deciding how to split their assets, without the worries over the potential CGT charges, and also reduces financial burdens. Furthermore, since the introduction of the no fault divorces, which was made effective from 6 April 2022, there are increasing delays in the Family Courts.
The changes also mean that a spouse or civil partner who retains an interest in the former family home will not be unfairly penalised if the other spouse remains in the property for a few years post-divorce, making this a more affordable option in circumstances where the retention of the family home in joint names is the only option.
It should be noted that these rules only assist couples who have been married or in a civil partnership, as couples who have not been married or in a civil partnership are unable to transfer assets under the nil gain/nil loss rules.