Under the old rules, when a married couple or civil partners separate, they could transfer assets between them in the tax year they permanently separated on a no gain no loss basis. This meant that the transferring spouse did not have to pay CGT on the assets transferred and the spouse receiving the assets did so at its original base cost.
However, if a transfer of assets occurred after the tax year in which the spouse/civil partners separated, the transfer would have been subject to CGT, the deemed proceeds being the market value of the asset. As a result, by the time of a divorce, dissolution of a marriage or civil partnership, the couple would be liable to CGT when assets were transferred as part of the final divorce settlement.
What are the new CGT rules?
The new rules can be summarised as follows:
- Separating spouses/civil partners will have up to three years, after the tax year in which they separated, to transfer assets on a no gain, no loss basis. This extension should allow sufficient time for the division of assets and other financial agreements to be agreed upon without the additional worry of how to meet the CGT liability.
- There will be no time limit to the no gain, no loss treatment for assets that are subject to a formal divorce agreement. This will be welcome news to couples who are unable to finalise their divorce agreements due to the backlog of cases in the family courts. Any spouse or civil partner who retains an interest in the former matrimonial home will have the option to claim Private Residence Relief (PRR) on their share of the capital gain when the property is sold..
- Favourable treatment also applies where an individual transfers their interest in the former matrimonial home to their ex-spouse or civil partner but remains entitled to receive a percentage of the sale proceeds when the property is eventually sold. They can apply the same tax treatment to the proceeds as when they initially transferred their interest. This means that if PRR applied at the time of the original transfer, the relief will be available when the property is sold, even though they did not live at the property.
Tax planning opportunities
The extension to the time limit for no gain, no loss transfers provides greater tax planning opportunities for separating couples, as they can now make more informed decisions about the assets they transfer. This change is significant – divorce proceedings are emotionally challenging, and it would be fair to say that tax planning might not be a priority. The extension allows couples to plan their financial separation more effectively, resulting in fairer outcomes. This is particularly crucial for individuals with complex asset portfolios, including businesses and properties. In some cases, lump sum payments might be more favourable than direct asset transfers, requiring careful consideration of potential tax liabilities.
While immediate tax can be avoided, future CGT for couples will still be a factor in financial settlements. Under the new rules, CGT is not avoided completely but deferred until the spouse receiving the assets disposes of it. The value of assets transferred to the spouse will therefore be lower as a result of the inherent capital gains.
The new rules do not change the position for individuals domiciled outside the UK or with overseas assets. They may still be subject to taxation in other jurisdictions. It is essential to navigate double tax treaty provisions and international tax rules, to ensure compliance and minimise potential tax implications.
The changes to CGT rules represent a positive step for divorcing couples in the UK. The extended window for asset transfers allows for more comprehensive financial planning, during an emotionally difficult time. They also highlight the importance of informed decision-making and proactive tax planning. As the implications of these changes continue to unfold, professional guidance remains crucial for couples seeking a fair and tax-efficient separation of assets.
For tax advice and support on the CGT rules for separating and divorcing couples,, get in touch with Kay Mind, Director, or a member of our Private Client team.
You can also listen to our podcast with Kay and Danielle Ford, Partner and Head of Tax Disputes & Resolutions, discussing the CGT rules, here.