Capital Gains Tax & Divorce: 2023 Guide With New CGT Rules
Capital Gains Tax (CGT) in divorce or separation differs compared to how it applies to payments made between spouses during a marriage – and the rules have changed as of April 2023. It is important to keep on top of the current CGT legislation and be mindful of the tax implications of payments and transfers regarding the family home, in particular.
Co-authored by Kelly Grigg, specialist family lawyer at Richard Nelson LLP, and Ross Atkinson-Beaumont, tax manager at Hodgsons, this guide walks you through the nuances of CGT and how it is applied during divorce or separation. Read on to learn all you need to know about the new CGT rules on divorce, as well as how to avoid paying CGT if you are going through a separation.
NB. Where we refer to a spouse within this article, we are also referring to a Civil Partner.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is potentially payable on the disposal of an asset, should that asset have increased in value since it was acquired.
Spousal exemption from CGT
If you are married, you can transfer assets from one spouse to another without any requirement to pay CGT. This is referred to as spousal exemption.
The legislation differs if you divorce or separate from your spouse, with CGT becoming payable under circumstances. Read on to learn about the current rules on CGT and divorce.
The new CGT rules on divorce
As of 6th April 2023, the spousal exemption time period has been extended. Spouses who separate can now transfer assets between them without being subject to CGT for an unlimited time if the assets are the subject of a formal Consent Order. Without an order, there is a time limit of the earlier of:
- The date on which a court grants a divorce (the annulment of their marriage, the dissolution or annulment of their civil partnership, their judicial separation or, as the case may be, their separation in accordance with a separation order) OR
- Three years after the year you stopped living together.
The new CGT rules are a positive move for those going through separation, as the previous time limit was to the end of the tax year of separation. There can also be additional benefits if you continue to have a financial interest in your former family home following separation that will apply when your home is eventually sold (more on this below).
CGT on transferral of assets following a separation
The new measures mean that separating civil partners or spouses now have up to three years after they stop living together in which to transfer any assets with the benefit of a “no gain/no loss” ruling (under this ruling, no CGT is applied).
The “no gain/no loss” ruling will also now apply to couples separating or divorcing who transfer assets between themselves and which form part of a formal Consent Order.
CGT on sale of property on divorce
Where the spousal exemption does not apply, there can be circumstances where a tax relief known as Principle Private Residence Relief can apply on the disposal of the family home. This may result in no CGT liability on the whole or part of the gain.
The rules on CGT and divorce for second homes
The sale or transfer of a second home could incur a CGT liability, just as any other type of asset.
As explained below, for the tax year 2023-2024, you can make tax-free capital gains of up to £6,000. So, if the property hasn’t made more profit than that, you won’t owe HMRC any CGT. If you paid stamp duty when you bought the property, that can be deducted, as well as Solicitors and Estate Agents fee for buying and selling the property.
Further, if you ever lived in the property as your main residence (before renting it out, for example), you may be able to reduce your overall CGT bill by using Private Residence Relief for those years.
The new tax-free allowance for CGT
Whilst the above will be good news for many, it is worth noting that the annual tax-free allowance for CGT changed at the same time as legislation regarding divorce.
The previous tax-free CGT allowance was £12,300. From 6th April 2023 the annual exempt amount for individuals and personal representatives reduced to £6,000 and £3,000 respectively.
How will this affect me?
Any property, land, or other investments you own that are sold as part of the divorce settlement, will attract tax once you have exceeded your tax-free allowance of £6,000 on any profits from that sale.
This change in tax relief is more than half of the previous annual exempt amount and therefore may reduce any residual capital you were expecting to receive on divorce.
How much will I have to pay?
This will depend on your individual assets and the terms of your divorce settlement.
When does the tax become due?
For residential property, there is a requirement to report and pay any CGT to HMRC within 60 days of disposal. For other assets the CGT will be payable by the 31st January following the end of the tax year.
How does HMRC determine the date of Separation?
For the purposes of CGT liability, you are deemed to have “separated” from one another if:
- It is expressed in a Court Order;
- It is expressed in a Separation Agreement; or
- In such circumstances that the separation is likely to be permanent.
Once the date of “separation” has been determined, transfers between married couples beyond the period of spousal exemption will be deemed to take place at market value, which could lead to a liability arising with regards to CGT. This will all depend on what date the disposal is deemed to have taken place on.
How does HMRC determine the date of Disposal?
Alongside your divorce, you will usually be negotiating and concluding a financial settlement too. Divorce proceedings conclude on receipt of Decree Absolute and financial matters conclude on receipt of a Judge approved sealed Consent Order.
A Consent Order will say “On Decree Absolute it is Ordered that…” and that the terms of such Order will not be enforceable under the Matrimonial Causes Act 1973 until such time as Decree Absolute has been made. However, as is often the case, transfers do take place prior to the obtaining of Decree Absolute.
If the transfers take place on receipt of Consent Order but prior to obtaining Decree Absolute, then the Court will deem that a Contract has been agreed between the parties to “act” prior to being divorced i.e., prior to obtaining Decree Absolute. In those cases, the date of “disposal” will be the date the Judge approved the Consent Order and not the future date on which the parties will obtain Decree Absolute.
If the parties choose to obtain a Consent Order and wait for Decree Absolute before they implement the transfers, the date of “disposal” will be the date the parties’ obtained their Decree Absolute.
However, if the parties choose to wait to obtain a Consent Order (and to implement it) until after they have got divorced (i.e., already in receipt of Decree Absolute) then the date of “disposal” will be the date the Judge approved the Consent Order.
If the parties choose to make transfers without having a Consent Order prepared, the date of disposal will be the date any contract is signed (i.e., completion day).
How to avoid Capital Gains Tax in divorce
Finalising the transfer of assets within three years of separation will ensure that no CGT is payable due to “no gain/no loss”. If the assets are made subject to a formal Consent Order, they can be transferred at any point in the future with no Capital Gains Tax payable.
Seeking specialist advice during a divorce
If you are going through a divorce or separation and require support with taxes or other financial matters, our team of family lawyers will guide you on how to negotiate the most tax-efficient settlement, working alongside Specialist Tax Accountants, who we as a firm trust to give you the best outcome possible. Get in touch today for a free consultation.
NB. The law and tax allowances referred to above is correct as at 29.08.23. This article is provided for general information purposes only and does not constitute legal or other professional advice. Readers are advised to seek their own specific legal and tax advice.
Our solicitors have prepared more helpful articles on financial assets and divorce, take a look at our articles on how to protect your pension in a divorce and what am I entitled to in a divorce settlement?