Capital Gains Tax (CGT) Rule Changes for Divorcing Couples (2024)

When couples go through a divorce or separation, transferring the matrimonial home and other properties between them can result in a Capital Gains Tax (CGT) liability. However, new rules announced in the Government’s Spring Budget extend the period during which CGT relief can be claimed on asset transfers. Effective from 6^th April 2023, these new rules have created a fairer and more practical system for separating spouses or civil partners – carry on reading to find out more, or contact us today for professional advice.

Previous CGT Divorce Rules

Under the previous rules, the treatment of asset transfers varied, depending on whether couples were still living together, or had separated/divorced:

• Couples living together: For couples living together, transfers were conducted on a “no gain, no loss” basis. This deferred any gains or losses until the receiving spouse disposed of the asset, and they were treated as having acquired the asset at the original cost (paid by the transferring spouse, which may have been years prior).
• Separated or divorced couples: However, once separation occurred, the “no gain, no loss” treatment only applied for the remaining tax year. After that, transfers were considered as normal disposals for CGT purposes.

This created challenges for couples who had to settle their affairs quickly (e.g., if they separated in March, with a new tax year starting in April) to avoid potential CGT liabilities – especially when multiple assets were involved, or court orders were pending.

New CGT Rules for Divorcing Couples

The government has introduced extensions to the “no gain, no loss” treatment for separating couples (rules regarding asset transfers for spouses and civil partners who continue living together remain unchanged). Effective from 6^th April 2023, the new time periods for claiming CGT relief are as follows:

• Up to three years after ceasing to live together as partners.
• For an unlimited period if the transfer occurs as part of a formal divorce agreement.

This revised approach provides divorcing couples with more time to reach a formal settlement without incurring CGT liabilities for the transferring spouse. It aims to create a fairer and more manageable process, particularly for those involved in complex asset division during divorce proceedings.

Impact on the Matrimonial Home

Separating partners who sell their matrimonial home may face CGT consequences. Normally, they would benefit from Principal Private Residence relief (PPR) to mitigate any CGT liability if they had lived in the home as their primary residence throughout their ownership period.

However, when separation occurs, one party often has to vacate the matrimonial home, leading to a misalignment between their “occupation” and “ownership” periods. This misalignment could expose the leaving spouse to potential CGT liability when the property is eventually sold, especially if they retain an interest in the property while the other party continues to reside there for an extended period. The leaving spouse may have an interest in the future proceeds of the property’s sale, which could appreciate over time (e.g., if the agreement is to sell when the children reach a certain age).

To address this issue, the leaving spouse can elect how their PPR is allocated between their former matrimonial home and any subsequent property they acquired after leaving. The options are as follows:

• Claim PPR when the property is sold: If a partner retains an interest in the matrimonial home, they can claim PPR when the property is sold (as long as they don’t claim PPR on any other property for the same period).
• Apply same tax treatment as initial transfer: In cases where the leaving spouse has transferred their interest in the property to their ex-spouse but maintains the right to receive some of the proceeds upon the home’s sale, they can apply the same tax treatment to those proceeds as when they initially transferred their interest. This means that any tax reliefs applicable at the time of the original transfer will continue to apply when the eventual sale takes place.

Need Help with Capital Gains Tax?

Do the recent CGT rule changes apply to you? We advise that separating spouses and civil partners seek professional guidance early. Navigating CGT liabilities can be complex and time-consuming – particularly in situations involving multiple properties and overseas assets. By seeking advice, both parties can find out the most effective approach to managing their tax exposure during transfer of assets. If you require assistance with CGT tax planning or have any inquiries, you can message us through our online form, call 01743 562430, or email hello@mercianaccountants.co.uk.