As of 6April 2023, new rules within the Finance Bill 2023 have relaxed the capitalgains tax rules upon divorce, dissolution of civil partnership or formalseparation.
What isCapital Gains Tax (CGT)?
A ‘capitalgain’ is the profit realised when an individual, partnership or companydisposes of a capital asset. Capital assets include almost every kind ofproperty (i.e. land, buildings, antiques and shares within a company).
A taxable‘disposition’ (or ‘disposal’) includes the sale or gift of an asset, tradingone asset for another, and even the destruction of an asset where insuranceproceeds are made available.
The ‘profit’,which is what is taxed for CGT purposes, is the difference between the saleprice of the asset (or the ‘fair market value’) when the asset is disposed of,and the cost of having acquired the particular asset (inclusive of any costs inimproving the value of the asset).
Remember:Exempted Disposals, where no CGT is incurred, includes transfers betweenspouses. The recipient spouse is deemed to have acquired the asset at the samecost as the ‘donor’ spouse.
CGTRules prior to 6 April 2023
Unlikeother taxes, CGT could remain payable on transfers between spouses and civilpartners prior to a decree absolute (Final Order). This was because therelevant date for CGT in the context of divorce was the date of separation.Therefore, any transfers which may have taken place between spouses or civilpartners in the tax year of separation were considered to be on a ‘no gain’ or‘no loss’ basis. However, after this event, charges could be incurred wherethere were increases in value of the matrimonial or civil partnership asset/s.
Remember:The tax year for individuals runs from 6 April to 5 April of the followingcalendar year (i.e. 6 April 2023 to 5 April 2024)
Therefore,the issue with the previous rules was that parties who separated later on in atax year could be disproportionately affected.So, if a couple were to separate on the 20th of April, theywould have until the following 5th April of the next calendar yearto complete any transfers without incurring a CGT charge. However, if a coupleseparated on the 29th of March, they would only have one week inwhich to transfer any assets between themselves. This undoubtedly increased thepressure on separating couples right at the early stages of their respectiveseparation.
CGTRules after 6 April 2023
The mainchanges to the rules are now as follows:
- Separatingcouples are now to be given three years, following the tax year of separation,in which to make any transfers on a ‘no gain’ or ‘no loss’ basis. This wouldtherefore apply to couples who separate but do not divorce with a finalfinancial order. This is a significant change to the old rules where therequirement was that couples had to complete transfers within the same taxyear.
- The‘no gain’ or ‘no loss’ treatment is unlimited in time if the assets are transferredin accordance with an agreement or order as defined in s225B(2)(a) ors225B(2)(b) of the Taxation of the Chargeable Gains Act 1992 (i.e. a formaldivorce agreement). Therefore, if a couple has a financial agreement or orderin connection with their divorce, which provides for the transfer of an assetfrom one of the parties to the other, this can be done at a ‘no gain’ or ‘noloss’ irrespective of how long the couple have since separated (i.e. more thana year).
- Aspouse who retains an interest in the former matrimonial home (FMH) can now begiven the option to claim Principle Private Residence Relief (PPR) when theasset is sold to a third party. Previously, a spouse could only claim this iftheir interest was transferred to the spouse in occupation of the FMH).
- Whereone of the parties transfers an interest in the FMH to the other, and, underarrangements made in connection with a divorce or separation, receives a sum ondisposal of the property at a later date (i.e., when the children reach the ageof 18), the receipt date is treated at that date as if it had arisen under theoriginal disposal (i.e., if the transferor has a claim for PPR on the originaldisposal).
The newrules are therefore welcomed by family law practitioners and removes many ofthe problems and inequalities previously faced under the old regime.
Haveany questions about divorce law? Get in touch with our expert divorcesolicitors
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