Capital Gains Tax Changes for Divorce or Dissolution of Civil Partnership Couples

Capital Gains Tax (CGT) can be incurred on the sale or disposal of an asset where the sale or disposal price is higher than the purchase price. However, CGT is changing how it impacts separating couples.

Our Family Law team will look at the changes to Capital Gains Tax and how it impacts separating couples and cohabitees.

capital gains tax separating couples

Current Rules

The Taxation of Chargeable Gains Act 1992 decided that couples who are married or in a civil partnership and living together can transfer assets between themselves free from CGT until the end of the tax year of separation.

It is often difficult for a separating couple with the emotions of separation to even be aware of the tax implication and to agree or achieve an order of the court and transfer the asset within the tax year of separation. After the end of the tax year of separation, the CGT exemption would no longer be available for transfer between the former spouses, incurring CGT on the transfer as if the asset was sold at full market value and possibly incurring the CGT charge.

Draft Finance Bill (No.2) 2023

It is proposed that there will be changes relaxing the CGT between separating couples to extend the “no gain, no loss” treatment. The Draft Finance Bill (No.2) is at the Report State in the House of Commons as of 7 June 2023.

It is important to understand that the proposed new rules do not avoid tax on any later disposal of the asset, as the acquiring spouse will inherit the purchase cost of the disposing spouse. The acquiring spouse may still have CGT on the future disposal of the asset. The asset would be acquired “pregnant” with the CGT liability.

It is proposed that:

  1. Transfers between spouses or civil partners of capital assets in the tax year of separation or in the subsequent 3 tax years, will not incur a CGT liability. 
  2. Any transfer between spouses or civil partners of capital assets as a result of a court-approved order will not trigger a disposal for CGT purposes at any time (even if more than three tax years after the tax year that they stop living together), as long as the disposal is pursuant to that order. This provision underlines the importance of ensuring terms of settlement are drawn up in a legally binding financial order.
  3. If a spouse or civil partner transfers their interest in the former family home to the other party in consideration of receiving a percentage of the net proceeds on sale, or if they retain their interest but vacate the property to enable a deferred sale, they are able to apply the same tax treatment to their share of the sale proceeds when received as those at the time of the transfer or departure from the home, as though paragraphs 1 and 2 above apply.  
  4. If a spouse or civil partner retains an interest in the former family home they have an option, subject to conditions, to treat the period of no longer residing in the family home as if it had been their only or main residence until the time of disposal and then claim private residence relief (PRR) when that interest is sold to a 3rd party.

Impact on Cohabitees

Cohabitees, no matter the length of their relationship or time living together, who are not married or in a civil partnership will not benefit from any of the above provisions whether current or proposed. 

Independent Legal and Tax Advice

Separating couples should always take good legal and tax advice on financial matters relating to the breakdown of a marriage or civil partnership. The impact on those who have a dual tax residence needs to take particular care with specialist advice. For example, a US citizen owning a UK property may be entitled to claim private residence relief on a transfer of the property between spouses in the UK, however, the US tax authority does not recognise the same exemption and therefore a transfer may give rise to a CGT liability in the US.

In all cases, it is important that CGT is considered at an early stage and proper advice is obtained.

Please contact Lisa Broddle, Partner, Head of the Family Team, Solicitor, Family and Collaborative Lawyer and Accredited Family Mediator or Annie Tanielian, Family Lawyer and Solicitor or a member of the Family Law Team in Twickenham and Teddington, on 020 8891 6141 or email familyteam@srb.co.uk.