CGT liability on divorce / separation: the changes explained

You’ll probably be aware that special rules apply to Capital Gains Tax when spouses or civil partners transfer chargeable assets to each other. However, many people are not aware of the rules regarding CGT liability on divorce or separation. In this post, we take a look at the current rules and some big changes that are in the pipeline.

Old rules regarding CGT liability on divorce / separation

Up to April 2023, if two spouses or civil partners separated, they could transfer chargeable assets to each other on a ‘no loss no gain’ basis. They had to do this during the tax year of their separation. However, from the following tax year, such transfers are subject to normal CGT rules. In other words, they could land the benefiting partner with a hefty tax bill.

Similar rules applied when a separated couple sold their shared home after one partner had left the house. In brief, CGT was payable unless they sold the property less than nine months after separation. This could potentially be avoided if the property was transferred as part of a divorce settlement. This required claiming private residence relief under S225B TCGA92.

However, in 2021, a report by the Office of Tax Simplification (OTS) argued for a rule change. It said: “it is unrealistic to expect separating couples to have resolved their affairs by the end of the tax year of their separation”. It recommended allowing ‘no loss no gain’ transfers for at least two tax years after separation.

Government has accepted the OTS’s broad argument. As a result, the Finance Bill 2022-23 ushered in a variety of changes that affect CGT liability on divorce and separation.

Proposed rules regarding CGT liability on divorce / separation

Under the new rules, spouses and civil partners are given up to three tax years to make ‘no loss no gain’ transfers. In addition, they have an unlimited period in which to make these transfers, provided they are made in accordance with a formal divorce agreement or a court order.

The rules concerning the family home also changed. Under the new legislation, a partner who retains an interest in the former shared home has the option to claim private residence relief when it is sold. This holds true even when they sell the property many years into the future.

Do you need help with a divorce?

The rule changes regarding separation and CGT are very welcome. They make it much easier for couples to reach a settlement. However, if you are currently in the process of separation or divorce, it’s a good idea to get tax planning advice as early as possible. With the right help, you can minimise financial worries at what is already a stressful time.