CGT Divorce Rule Changes From 2023

Recently, there have been some changes in the law that have seen reforms to the process of getting divorced. The government finally introduced a “no fault” law which now allows couples to separate legally without needing to assign any blame to one or both parties for the breakdown of the relationship. 

In the past, couples were required to either cite a reason for divorcing or separate for either 2 or 5 years. Suitable reasons including unreasonable behaviour, adultery or similar allegations relating to the conduct of one partner. As a result, one person was required to take all of the blame and that could lead to ill-feeling. 

The change in the law now allows couples to write a statement that says there has been an irretrievable breakdown of the marriage. This allows talks to be a lot more constructive, focusing on major areas like children, finances, and living arrangements instead of accusations about why the marriage failed. 

Another significant change that will be coming into play on 6th April 2023 relates to the division of assets when couples divorce. 

The Financial Impact Of Divorce

It has long been essential to consider how assets will be divided at an early stage in the divorce proceedings, and it has always been vital to take appropriate professional advice, particularly when taking into account the possible impact of CGT (Capital Gains Tax). 

If couples fail to transfer their assets before the tax year end during which they separated, an unexpected Capital Gains Tax bills can be the result when assets are transferred at a later time. 

Capital Gains Tax is levied when an individual who pays tax in the UK disposes of one of their capital assets when the value of its disposal is higher than the cost of its acquisition. When taking into account disposals between parties that are “connected”, a disposal is deemed, in general, to take place at the asset’s market value. 

Nevertheless, transfers between spouses are not liable for CGT as long as the couple live together. When couples divorce, things can become more complicated, and while there are provisions to provide some relief in limited circumstances from CGT, they are very restrictive in modern divorce situations.

A lot of divorcing couples fail to take tax implications into account and do not realise the importance of timing asset transfers between them correctly. Some, therefore, find they receive an unnecessary and unwelcome capital gains tax bill at a challenging time in their lives. Therefore, there has been an amendment to the law, updating it so that it reflects a more modern and fair approach to divorce.

What Do The Changes Mean For Asset Disposals?

On 5th April 2023 or after that date, all separating spouses will have a maximum of 3 tax years following the tax year during which they cease cohabiting during which they can make a “no gain, no loss disposal” for the purposes of capital gains tax. 

This will still apply with no time limits to all transfers between divorcing spouses pursuant to their formal divorce agreement. So, for example, should a couple separate on 22nd August 2023, a “no gain, no loss” rule applies to all transfers made until 5th April 2027. 

The result is, effectively, tax relief for CGT purposes, although it will not allow couples to avoid paying tax on any assets that are disposed of at a later date between spouses since the acquiring spouse will inherit the acquisition value/base cost of the disposing partner. However, it represents a practical tool to ensure that capital gains tax will not be triggered due to the financial arrangements made during the process of a divorce by effectively rolling over the gains to the receiving party. 

The position therefore will be as follows from 6 April 2023:

In cases where one spouse still retains their interest in their former matrimonial property, they will be able, depending on specific conditions, to treat the time during which they no longer lived in the property, as if the home had being their main or only residence until such time as it is disposed of, thus allowing them to claim PRR (private residence relief) when the interest is sold onto a third party. This is only the case so long as the other spouse still lives in that property as a primary residence themselves.

For ex-spouses who want to move on in terms of accommodation, there are limits to this provision’s practical application. If a departing spouse acquires a new primary residence of their own but then claim tax relief on their former matrimonial home, they will then no longer be able to claim it on their new primary residence since you can only claim primary residence on one property at a time. 

In cases where one spouse transfers their interest in their former matrimonial property to their former spouse, receiving a portion of the proceeds of sale at such time that the property gets sold, or, alternatively, vacates the home but continues to retain their interest in it, thus allows for a deferred property sale; they will be able to apply the same treatment for tax purposes to the proceeds when they receive them at some future time that they could have enjoyed at such time that they vacated the home or transferred their interest in it to their former partner. 

The Benefits Of The Changes

While some divorcing partners have always been able to conclude the financial issues that arose from their separation before the tax year during which they separated came to an end, for a lot of couples, for example, those that separate in March just before the tax year ends in April, there is minimal time in which to finalise such matters. 

These changes extend the “no gain, no loss” disposal window and make it far easier to deal with financial matters without any rush or stress.

In all cases, separating couples should take advice regarding their tax position and they should still continue to consider capital gains tax as early in the divorce proceedings as possible to avoid any complications. 

It is also essential to remember that partners who have been together in the long term but who have not married or formed a civil partnership cannot benefit from the provisions above since common law spouses do not exist for purposes of tax.