Divorcing spouses benefiting substantially from new rules of capital gains tax
By Vanessa Lloyd Platt
Divorce proceedings can be a complex and emotionally taxing process, with financial settlements often becoming a contentious issue. Recent changes to the Capital Gains Tax (CGT) rules, however, offer substantial benefits to divorcing spouses, easing some of the financial burdens associated with the division of assets. How do these changes impact divorce and capital gains tax?
Understanding Divorce and Capital Gains Tax (CGT)
Capital Gains Tax is a levy on the profit made from the sale of an asset that has increased in value. For divorcing couples, the CGT implications on the transfer and sale of assets such as the family home, other property, or investments can be substantial.
Traditionally, transfers between spouses during a marriage or civil partnership are exempt from CGT. However, once a couple divorces or permanently separates, these transfers could become subject to CGT unless specific conditions are met.
New Rules and Their Impact
Under new rules that were introduced in April 2024 by HMRC, a divorcing spouse can transfer assets to the other party (quite often the matrimonial home) on a no-gain, no-loss basis at any time, provided that the transfer is included within a formal divorce agreement such as a Court Consent Order. This is likely to cover the vast majority of divorce cases where the concession is relevant.
The recent amendments to the CGT rules extend the period during which divorcing couples can transfer assets without incurring CGT. Now, spouses have until the end of the third tax year following their permanent separation, or until the decree absolute is granted, whichever is later to make what is known as “no gain, no loss transfers” to the other spouse. This extension allows more time for a well-considered financial settlement, reducing the need for hasty decisions driven by tax deadlines.
There are now more generous Capital Gains Tax UK Changes payable by spouses following the sale of the former matrimonial home. Whilst the divorce and capital gains tax rules are quite complex, they will nevertheless ensure that many spouses who previously would have had to pay CGT on the sale of the family home, will no longer have to.
Key Changes Benefiting Divorcing Couples
- Extended Time Frame: The extension to the third tax year provides a more reasonable period to settle financial matters without the immediate pressure of CGT liabilities.
- Main Residence Relief: The occupying spouse can claim Private Residence Relief for the period they lived in the marital home, plus an additional nine months. This relief can significantly reduce or even eliminate CGT on the sale of the family home.
- Deferred Sale Agreements: In cases where the family home is retained for a period before sale (often for the benefit of children), the CGT liability is deferred until the property is eventually sold.
The rules previously had become so onerous that some parties found themselves having to pay the CGT within nine months of separation. This led to all sorts of pressure being placed on divorcing couples.
Previously, and prior to the new rules coming into effect, the no-gain, no-loss treatment only applied if the transfer was made during a tax year in which the parties were or had been living together.
This often resulted in transfers having to be made before 5 April in the year in which the parties separated. Again, this led to many divorce lawyers having to rush through financial settlements in order to have Consent Orders approved to enable the parties to make the transfer before the relevant date.
Finally, more interspousal transfer of assets will be assessed on a no-gain, no-loss basis i.e. any gains or losses from the transfer will be deferred until the asset is later disposed of. This means in cases where the asset is not disposed of for many years or never at all, this will dramatically reduce the level of CGT payable at the time of the parties’ divorce.
Legal and Tax Advice
The new CGT rules represent a significant step forward in easing the financial complexities associated with divorce. By extending the period for CGT-free transfers and providing clarity on various reliefs, these changes offer substantial benefits to separating couples.
For the leaving spouse, the changes mean there is less urgency to transfer assets quickly, allowing for more strategic planning and potentially more favourable financial outcomes. The receiving spouse also benefits by having clarity on their tax position, which can be crucial for their financial planning post-divorce.
Lawyers everywhere are celebrating the introduction of these rules which have alleviated much of the tax pressure on divorcing couples which produced many unfair results and had the effect of dramatically reducing the parties’ assets at a time when these needed to be maximised.
Despite these favourable changes, it is essential for divorcing couples to seek comprehensive legal and tax advice. Firms like Lloyd Platt and Co Solicitors can provide guidance tailored to individual circumstances, ensuring compliance with the latest legislation and optimising financial outcomes.
Contact Lloyd Platt & Co Today
If you are in any doubt as to whether there will be any CGT payable arising out of your divorce, that not only applies to the matrimonial home but to investment properties that you may co-own or other assets that need to be transferred as part of the divorce, please speak to your lawyer or accountant so that the correct information can be provided to ensure that there are no nasty surprises during the course of your divorce.
By understanding CGT and divorce and seeking appropriate advice, divorcing couples can manage their financial settlements more effectively, ensuring a smoother transition during a challenging time.
If you want to discuss any aspect of divorce and separation, including divorce and capital gains tax, please fill in our form below, call us on 0208 343 2998 or click to contact our divorce lawyers in London.
