Of all the things considered by couples in the midst of separation and leaving the family home, Capital Gains Tax (CGT) rarely features.

Couples who seek advice post-separation are often surprised when, under current rules, they are advised that the transfer of assets between them on a nil gain / nil loss basis applies only in the tax year of separation (save when Principal Private Residence (PPR) relief applies to the family home). This leaves those who separate towards the end of the tax year little time to resolve and implement their financial separation and many miss out on the nil gain / nil loss window (or decide to reconcile, only to separate again after 6 April).

Under the current rules (in place up until to 6 April 2023) if a couple miss the nil gain / nil loss window, transfers are treated as normal chargeable disposals for CGT and the asset is deemed to be ‘sold’ at the market value. In these cases, not only is a transferring party losing the asset as part of the financial settlement but they may also be liable to pay a significant CGT charge when in reality they have not received any sale proceeds from which to cover the CGT liability. They have not truly ‘gained’ anything at all.

Another unforeseen and unwelcome tax liability may currently arise where one party has moved out of the family home and upon a later sale can no longer claim PPR relief for the full period of their ownership. The reduction of the period during which PPR relief could still be claimed after leaving the property to 9 months increased the incidence of liability to CGT in this scenario.

The Changes – New CGT Considerations for Divorcing Couples

The Spring Finance Bill 2023 (published 23 March) has now confirmed the anticipated and welcome changes to CGT rules on divorce and dissolution. Jennifer Pollock and Fiona Wheeler outlined the current rules in further detail here.

Transferring Assets

The new legislation, applying from 6 April 2023, provides amongst others that:

  • Separating spouses or civil partners have up to three years after the year in which they cease to live together to make nil gain / nil loss transfers.

  • Where there is a financial order on divorce made via a consent order and approved by the Court or within financial remedy proceedings, nil gain / nil loss will extend indefinitely to all assets that separating spouses or civil partners transfer between themselves.  

The changes allow couples time when deciding how to divide their assets without additional worries over CGT charges. They further ensure that nil gain / nil loss treatment is not lost to increasing Court delays or non-compliance by the other party.

Subject to satisfying the new conditions, the changes provide that a chargeable disposal for CGT is not triggered when assets are transferred between separating couples on financial division. The receiving party takes the asset at the original acquisition value and CGT will not therefore be payable immediately under the new rules, although CGT should still be considered when calculating the net effect of the division as the rules do not remove a CGT liability, if the asset is later sold. This approach is considerably different to the CGT treatment of assets left to a surviving spouse on death, for example, where assets are uplifted to market value for CGT as at the date of death (with any CGT payable on the gain extinguished) rather than inherited at the acquisition value.

For example, consider a husband who receives a property portfolio initially purchased for £1,000,000, two years after he and his wife separate. Even if, on the transfer, the portfolio is valued at £2,000,000, the husband will still take it at the original acquisition value of £1,000,000. The CGT on the gain lays dormant and will be relevant if the husband sells the portfolio.

Retaining an Interest in the Family Home

Also applying from 6 April 2023:

  • A spouse or civil partner who retains an interest in the former family home will be given an option to claim PPR when it is sold.

  • Individuals who transfer their interest in the former family home to their former spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is sold, are able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the home to their former spouse or civil partner.

In these cases, there are still relevant CGT considerations for divorcing couples or couples dissolving a civil partnership. Departing spouses and civil partners will need to consider whether to maintain PPR relief on the family home or apply it to their new property.

For divorcing couples or couples dissolving a civil partnership, these new rules represent a significant simplification and may assist in resolving their financial arrangements more quickly. However, these rule changes do not apply to unmarried cohabiting couples for whom the tax implications of transfers of assets between them on relationship breakdown remain the same.