Capital Gains Tax In Divorce Demystified (4 March 2024)

HMRC have published draft legislation to change the rules on the transfer of assets between spouses and civil partners who are in the process of separating and are no longer living together

The Current Rules on Capital Gains Tax

Under the present law, spouses and civil partners are able to transfer assets between themselves at no gain no loss for capital gains tax (CGT) purposes, up to, and including, the year of permanent separation. After the year of permanent separation, any transfer of assets is subject to CGT with the deemed disposal proceeds being the market value of the asset. This tends to mean that by the time of a divorce or a dissolution of a civil partnership, CGT liabilities can arise when assets are transferred as part of the financial settlement.

Proposed Changes to the Rules

Last year, the Government introduced more favourable tax rules. The separating spouses or civil partners will be given:

• Up to 3 years, after the year of separation, to make no gain no loss transfer of assets.
• Unlimited time to transfer assets when they are subject of a formal divorce agreement.
• A spouse or civil partner who retains an interest in the former matrimonial home will have the option to claim Private Residence Relief when it is sold.
• Individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner, and are entitled to receive a percentage of the proceeds when that home is eventually sold, will be able to apply the same tax treatment to on the receipt of those proceeds that applied when they transferred their original interest in the home to their ex-spouse or civil partner.

Planning Financial Settlements Tax-Efficiently

The proposals are intended to provide valuable time for spouses and civil partners in the process of separating to organise their financial affairs without unwelcome CGT liabilities, which is positive news.

For families and their advisers, the proposed changes create some helpful tax outcomes including:

• It should be easier to transfer assets without the risk of a "dry tax charge" arising (i.e. where there are no cash proceeds).
• It should remove the complexities around establishing the date of disposal for separating couples.
• It can remove the complications of whether CGT holdover relief is available on a transfer of assets, post the year of permanent separation, between a separating couple.

However, complexities remain for separating couples

Although the proposals are welcome, separating couples will need still need to consider the tax consequences of their proposed financial settlement where other asset disposals are envisaged, including in the following scenarios:

• CGT may still arise if cash is required as part of separation so proactive consideration is needed where there are disposals of an asset to a third party, or where it is difficult to agree the future ownership of the asset.
• The UK tax changes will not apply where any overseas assets trigger tax issues in the local jurisdiction – so tax could still arise on a transfer of an asset between a couple depending on where it is situated.
• Proactive planning to make use of the tax reliefs available to both parties can deliver significant financial benefits to both parties on divorce. The extension of the no gain no loss rules makes it unlikely to use any Capital Gains Tax (CGT) reliefs, like capital losses or Business Asset Disposal Relief, against the deemed gain from transferring an asset, which is considered to be sold at its market value. Equally, the recipient acquires the asset at its original acquisition value, so this may trigger a significant tax charge if they later choose to sell it.
• The proposed rules do not extend to income tax and therefore any dividends or bonuses taken from family company (often used to fund a settlement) may still trigger liabilities.

Detailed Planning is still required

In summary, when considering the financial order and the split of assets between a separating couple, it is vital to consider the tax position of the couple in detail as tax can still reduce the total value of the assets to be divided between the parties. In most circumstances it will be important to understand any latent capital gains within the assets to ensure there is an equitable split of value.

For example, husband and wife, own a property portfolio and it has been agreed, upon divorce, the husband will be the sole owner of a property worth £500,0000 which was originally acquired for £100,000 and the wife will be the sole owner of a property worth £500,000 with an acquisition cost of £300,000. If all things remain equal, on a future sale of the properties the husband will have a larger capital gains tax liability due to the lower acquisition cost.

At Duncan Lewis Solicitors, our Family department comprises of lawyers specialised in handling cases involving High Net Worth individuals. We can provide expert legal advice to help you determine whether the assets in a specific trust are likely to be considered as part of the marital estate, eligible for division between the parties, or if they are more likely to be considered non-matrimonial and excluded from the division. Our team of High Net Worth Divorce Solicitors are dedicated to assisting you with all aspects related to divorce or separation.

For more information on our high net worth divorce specialists here