Tax on Divorce: Government to Relax Legislation

The government is due to relax CGT on divorce, giving couples more time to make property transfers.

CGT on Divorce
CGT on Divorce

(3 minute read)

Today’s tip will cover:

  • When you pay CGT on divorce
  • How changes to legislation will impact property transfers during divorce

CGT on Divorce

Divorce is not easy, and there are many issues to be concerned with other than tax.

Even upon a divorce settlement, separated individuals are treated as a unit for tax purposes.

However, there are benefits, especially in regards to transferring assets.

Present rules state that divorcing couples are liable to CGT (Capital Gains tax) starting the tax year after their separation, on 5 April.

CGT states that any transfers between ex-partners are taxed if they are sold at a higher value than the original price.

To avoid unpleasant surprises, read below to find out how to benefit from the current and upcoming rules on CGT relief.

Currently, divorcing partners have a year or less to benefit from the no gain/no loss’ rule which states that any assets transferred between couples can be acquired tax-free.

For example, if a partner acquired a good which increased its market value, the other partner can still acquire it for the original price.

Some couples, however, won’t have enough time to get these affairs in order on time, especially if they separate right before the end of the tax year.

This is why the government agreed to relax the rules on CGT for couples in the process of separation.  

Proposed New Rules

The new Finance Bill to be introduced in the tax year starting on 6 April 2023 will allow divorcing partners to relieve CGT expenses. 

However, before 6 April 2023, draft legislations in place state that:

• Couples who are married, or in a civil partnership, can transfer assets between themselves at ‘no gain/no loss’. This ceases on 5 April in the next tax year of separation.

• In the case of a transfer in property, Principal Private Residence Relief (PPR) can be extended if a spouse continues to inhabit it. 

The Impact on CGT on Divorce

The new rules which are presently proposed are:

• Couples can benefit from the ‘no gain/no loss’ until the third tax year after separation. 

• If a property is sold by a partner who had transfered interest, they can claim a percentage of the sale with the same tax treatment as at the time of the original purchase.

• Any assets sold at a higher market value are sold or ’transferred’ between divorcing partners without a CGT liability within 3 years following the legal separation.

These measures especially benefit divorcing couples who are rich in assets, without impacting them financially. In all cases, it is best to consult tax advice for expertise on your specific case.

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