Change to Capital Gains Tax rules on separation

An unexpected Capital Gains Tax (‘CGT') bill can come as a nasty surprise to someone who has separated from their spouse. However, a new change to the rules should make this a thing of the past.

What is Capital Gains Tax (CGT)?

Many people going through separation or divorce will never have come across CGT. We therefore need to look at exactly what it is, before we consider how it operates in connection with separation, divorce or civil partnership dissolution.

Capital Gains Tax is a sort of income tax on property, payable on the increase in the value of the property. Thus, when you dispose of property that has increased in value since you bought it, you pay CGT on the amount that the property increased in value.

Note the words ‘dispose of'. CGT arises not only when property is sold but also when it is disposed of by other means, for example when it is given away or when it is transferred to someone else.

CGT is not payable on the disposal of all assets. It is only payable on the disposal of certain ‘chargeable assets', including personal possessions worth £6,000 or more, property that is not your main home, shares, and business assets.

Like income tax, there is an annual allowance for Capital Gains Tax, below which it is not payable. The current allowance is £12,300. You therefore only pay CGT on gains over that sum.

How Capital Gains Tax (CGT) on separation works now

Obviously, when a couple who are married or in a civil partnership separate then one or both of them is likely to dispose of certain assets, at some point after the separation. They may, for example, dispose of their interest in the former matrimonial home, by transferring it to their (former) spouse.

And such a disposal may give rise to a potential Capital Gains Tax liability.

But transfers of assets between spouses or civil partners are subject to a special rule, to avoid an immediate liability to Capital Gains Tax.

The rule provides that transfers of assets between spouses and civil partners who are living together are made on a “no gain or no loss” basis in any tax year in which they are living together.

This means that any gains or losses from the transfer are deferred until the asset is disposed of by the receiving spouse or civil partner, who will be treated as having acquired the asset at the same original cost as the transferring spouse or civil partner.

This time the words to be noted are “in any tax year in which they are living together”. This means that for separated couples the special rule will only apply to any transfer that happens in the remainder of the tax year in which they separated. After that, transfers are treated as normal disposals for CGT purposes.

Obviously, this can lead to particular difficulties, especially if the separation occurred late in the tax year, giving very little time to sort out the financial settlement.

How it will work under the new rules

Under the new rules the separating couple will be given up to three years after the year in which they separate in which to make “no gain or no loss” transfers.

And where the transfer is made as part of a formal divorce agreement there will be no time limit at all.

These new rules will apply to disposals that occur on or after the 6th of April 2023.

The new rules are a very welcome development. They will not only mean that many people who separate will avoid an unwanted Capital Gains Tax bill, but also that separating couples will be given much longer to sort out financial settlements, concentrating upon divorce, rather than CGT, considerations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.