New legislation for Capital Gains Tax on divorce

Specialist divorce solicitor, Carol Toulson, takes a look at the recent changes to legislation affecting Capital Gains Tax on divorce.

We certainly welcome proposed new revisions to the Capital Gains Tax Legislation which will allow separating spouses to transfer assets between them without incurring Capital Gains Tax for an extended period.

The current law for Capital Gains Tax after divorce

The current law allows spouses to transfer assets on a “no gain or no loss” basis in the tax year in which they are living together. This means that a spouse can transfer assets to the other spouse without incurring Capital Gains Tax provided they do so between the date of separation and the end of the tax year in which they separate. This can produce varying results as if you divorce in January you would have only approximately 3 months before the end of the tax year within which to transfer assets while if you divorce on 7th April you would have a full 12 months.

What are the changes?

The proposed new revisions which will be introduced in the Finance bill 2022/2023 will provide that separating spouses will be given up to 3 years after the year they separate or cease living together in which to make transfers without incurring Capital Gains Tax.

It is also proposed that the no gain or no loss treatment will also apply to assets that separating spouses transfer between themselves as part of a formal divorce agreement.

An important development is that a spouse who retains an interest in the former matrimonial home will be given an option to claim private residence relief (PRR) when it is sold.  This would also apply to spouses who transferred their interest in the former matrimonial home to an ex-spouse and are entitled to receive a percentage of the proceeds when the home is eventually sold.  In these circumstances the spouse retaining the interest 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. 

In many matrimonial cases a spouse will leave the matrimonial home and move in with family or to rented accommodation and given the delays at Court it can take quite some time until a financial settlement is agreed or ordered by a Court and the matrimonial home is sold. Currently, if the parties then sell a matrimonial home in joint names then the spouse who remained in occupation will not incur Capital Gains Tax because they will be able to apply private residence relief, however, the spouse that has left, even if their current accommodation is entirely unsatisfactory, will not be able to claim private residence relief and can find themselves with a hefty tax bill. In these circumstances an extension of time under the new provisions will certainly be welcomed by family lawyers and clients alike.

This measure will certainly make the process fairer for spouses who are separating or divorcing and are in the process of distributing assets between themselves.
The new provisions will apply to disposals that occur on or after 6th April 2023.

Specialists in divorce advice

When dealing with complex financial matters in divorce or separation, it is always advisable to consult a lawyer to ensure your interests are fully represented. Our specialist team of divorce solicitors can provide guidance and help you through the divorce and financial settlement process.