They say “nothing is certain in life but death and taxes”, but when it comes to Capital Gains Tax (CGT), the goalposts have been moved in recent years, further complicating the path of divorce and resolution of financial matters. Here is what you need to know:
The current position
Regarding CGT on divorce, married couples and civil partners can transfer assets between them free of CGT until the end of the tax year in which they separate (i.e. before 6 April 2023) with any transfers taking place in the tax year following the separation subject to the tax.
In addition to the above, separating couples also need to consider Principal Private Residence (PPR) relief, which provides an exemption from CGT on the disposal of a property which you own and occupy as your only, or main, residence. This issue often arises when one party moves out of the jointly-owned family home, raising queries over whether CGT may be payable if the home is sold.
If a spouse or civil partner moves out, the usual position is that they can claim PPR for a period of nine months after they have vacated the property. This means after that window, and in circumstances where a family home is to be sold, unless it is sold within 9 months of the vacating spouse/civil partner leaving the family home, then a CGT liability may arise for the party who has vacated.
Separate provisions apply where one party to a marriage or civil partnership transfers their interest in the jointly owned family home to the other party. In this instance, the transferor may be able to claim PPR relief from the transfer on the basis the transferee continues to occupy the property, the transfer forms part of the financial settlement and the transferor has not elected for PPR relief on another property.
In circumstances where the family home is to be sold, the current provisions only provide for the party who moves out of the family home to have nine months in which to effectively reach a financial agreement with the other party and complete on the sale of the family home. This is simply not long enough in the majority of divorces/dissolutions to both reach a resolution and implement the terms of the agreement reached i.e. completion of a sale of the family home.
Review and changes
It is widely agreed the CGT rules for separating couples were inadequate and a request by the government in July 2020 for the Office of Tax Simplifications (OTS) to review CGT was widely welcomed.
The following changes, reflecting recommendations made by the OTS, are due to apply to disposals that occur on or after 6 April 2023:
- Separating spouses or civil partners shall be given up to three years after the tax year they cease to live together in which to make ‘no gain, no loss’ transfers;
- ‘No gain, no loss’ treatment will also to apply to assets that separating spouses or civil partners transfer between themselves as part of any formal divorce;
- A spouse or civil partner who retains an interest in the former matrimonial home shall be given an option to claim PPR when it is sold; and
- Individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a share of the proceeds when the former matrimonial home is eventually sold, will be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the house to their ex-spouse or civil partner.
The above changes will provide parties with more time to reach a resolution which best meets their needs, without having to worry too much, or at least immediately, about potentially substantial CGT implications.
In the vast majority of cases, this is likely to be helpful with one less issue to deal with. However, it is not a perfect solution and individuals in this situation should seek sound legal advice before progressing the process.
If you would like to know more about any of the issues raised in this article please contact the Thrings Family Team.
