Changes to capital gains tax on divorce
Throughout this article, please note that the reference to marriage, spouses and divorce applies equally to those in a civil partnership.
Most of you will be aware that the sale or transfer of an asset can trigger the payment of capital gains tax (CGT). What is often overlooked, is that the sale or transfer of assets upon divorce, even if transferred to one another, can trigger a CGT liability. The consequence of overlooking and not dealing with this potential CGT can amount to several thousand pounds. The date for payment of that CGT liability could also be immediate, irrespective of whether any liquid capital is being released at that point.
There are changes afoot but to understand the changes, it is helpful to understand the current position. The Finance Bill 2023 is due to receive royal assent later this year and it is anticipated the changes will be backdated the beginning of this tax year (that is 6 April 2023). The intended changes will change the landscape of CGT on divorce.
The current rules
A transfer of assets between spouses is made on what is known as a “no gain, no loss basis.” This means that transfers between spouses do not incur any immediate CGT liability requiring payment. Instead, the CGT is deferred until the asset it is disposed of or transferred by the receiving spouse. This means that the receiving spouse will be considered to have obtained the asset at the original cost that the spouse who previously owned it bought it for.
Fred purchases a commercial property worth £500,000 in 2015. Fred transfers the property, now worth £850,000, to his wife, Mildred in 2021. No CGT is paid on that transfer. Mildred sells the property in 2022 for £900,000. When calculating the CGT liability, the purchase price of the property for the calculation of CGT will be £500,000 (not the £850,000 market value when Mildred received it.)
Where spouses separate or divorce, the “no gain, no loss” principle only applies for the tax year of separation. It is rare for couples to consider the time of year in which separation occurs. It was, therefore, possible for couple to have anywhere from 1 day to essentially 1 year to agree the division of their assets depending on whether they separated on 4 April or anywhere after 6 April. This seemed quite unfair. Additionally, it isn’t uncommon for it to take longer than 12 months to agree the division of marital assets, either because the assets were complicated, the couple couldn’t reach agreement or delays in receiving the court order.
Peter and Aleesha married in 2010 and over the years purchased a portfolio of rental properties. Some of these are in Peter’s name, some in Aleesha’s sole name and some in joint names. Peter tells Aleesha on 1 February 2020 that he doesn’t wish to continue their marriage. Peter and Aleesha would have only 2 months to agree and implement a financial agreement dealing with which properties will be transferred to each of them before CGT would be incurred. The tax year of separation would end on 5 April 2020.
Liam and Isobelle were married in 2015. Isobelle works in an industry where she receives part of her salary in the form of company shares which are held in her sole name. Isobelle meets someone else and tells Liam that she wants a divorce in March 2021. Liam and Isobelle attend counselling but decide that their marriage is over in May 2021. Liam and Isobelle have 11 months to decide on any share transfers as the tax year of separation doesn’t end until 5 April 2022.
The new rules
There are no intended changes for couples who remain married.
Where spouses separate or divorce, the government has extended the “no gain, no loss” principle as follows:
- For an unlimited period where the transfer of an asset occurs as part of a legally binding financial order – i.e. the “no gain, no loss” rule would apply indefinitely in those circumstances;
- For up to three years after the year in which a couple cease living together
This relieves the pressure significantly and allows both parties ample time to consider matters carefully and seek both legal and financial advice as necessary. Neither party is penalised by having to meet an immediate CGT liability on a transfer if there is some delay in dividing the financial assets. Tax advice would still be recommended to understand the future potential tax consequences. Legal advice would also be required to obtain the most long-reaching tax protection which is only received on having a financial order.
Bassim and Victoria separate on 1 August 2023. They run a business together and have obtained financial and legal advice on the division of the company, but it has taken some time to do so. They reach agreement on the division on 1 August 2025 but decided not to get a court order. They will receive the benefit of the new rules and the “no gain, no loss” approach to CGT will apply to the transfer of shares in the business.
As above, but agreement is not reached until 1 January 2027. In this scenario, Bassim and Victoria would need a court order or they would incur a CGT charge on the transfer of shares.
You will likely be aware that there are some exemptions in respect of the payment of CGT, particularly in respect of the family home. Please look out for second article which will deal with CGT on the family home and the changes brought in by the Finance Bill 2023.
On the assumption The Finance Bill 2023 receives Royal Assent as anticipated, this is great news for separating couple. This does not however diminish the need for good legal and financial advice to ensure you receive the tax treatment you are expecting.