The capital gains tax rules for separating or divorcing couples are to be relaxed. It means the period for ‘no gain, no loss’ transfers will be extended to three years for married couples and civil partners who separate or divorce.

So, from 6 April 2023, spouses and civil partners who are in the process of separating or divorcing will have up to three years after the tax year they stop living together to make ‘no gain or no loss’ transfers of assets between them. It gives them more time to transfer assets between themselves without triggering a possible capital gains tax (CGT) charge.

And the new rules give couples unlimited time to make ‘no gain, no loss’ transfers if the assets are part of a formal divorce agreement.

What are the current CGT rules for separating and divorcing couples?

Under the current law, separating couples can transfer assets freely between themselves until the end of the tax year of permanent separation without facing a CGT bill.

But if the transfer is made in the next tax year, the transfer is treated as taking place at market value and there could be a capital gain, even if no cash changed hands. So, if a couple separated on 4 April 2022, they’d only have until the following day (5 April 2022) to transfer their assets without incurring a tax charge.

Why are the rules changing?

The changes follow recommendations by the Office of Tax Simplification (OTS) in its second Capital Gains Tax report, ‘Simplifying practical, technical and administrative issues’. The OTS recommended the Government should extend the ‘no gain no loss’ window on separation to the later of:

  • The end of the tax year at least two years after the separation event
  • Any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent processes in Scotland

The Government agreed with the OTS that the ‘no gain no loss’ window on separation and divorce should be extended. And now the proposed changes have been confirmed in the Autumn Statement and the measures will be enacted in the forthcoming Finance Bill.

What are the new capital gains tax rules?

The new rules, which apply to disposals on or after 6 April 2023, are as follows:

  • Separating spouses or civil partners will have up to three years after the tax year they stop living together to make no gain or no loss transfers.
  • No gain or no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement.
  • A spouse or civil partner who retains an interest in the former matrimonial home will be given an option to claim private residence relief (PRR) when it’s sold.

Plus, the changes introduce special rules for individuals who have transferred their interest in their former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold. They can apply the same tax treatment to those proceeds when they receive them that applied when they transferred their original interest in the home to their ex-spouse or civil partner.

Our thoughts on the ‘no gain, no loss’ CGT changes

Divorcing can be a very traumatic time emotionally but can also be challenging for couples who are trying to separate their financial affairs.

As the tax rules are neutral in relation to interspousal transfers, it can often be overlooked there are different rules for couples who are in the process of divorcing.

So, it’s important that divorcing couples understand the tax implications of any financial packages that are being agreed between them. Mistakes can be costly in tax terms if they’re picked up by HMRC later.

Capital gains tax expertise

Our professional tax advisers are experienced at dealing with the complex and evolving UK tax rules, including capital gains tax for separating and divorcing couples. We can support couples with their tax arrangements and can also advise intermediaries acting on their behalf.

Call our team on 07813 434195 or email: stephanie.churchill@churchilltaxation.co.uk

Steph Churchill

Stephanie Churchill

Managing director & co-owner of Churchill Taxation