Divorcing couples are sometimes confronted with unexpected tax implications when it comes to implementing financial settlements. In particular potential liability for Capital Gains Tax (CGT) shoud always be borne in mind if assets like the former matrimonial home are being transferred from one spouse to the other.
Here we look at the possible impact a 2023 simplification of the CGT rules might have on the transfer of assets following divorce.
CGT And Transfers Between Spouses
Under tax law jargon assets transferred between spouses or civil partners are made on a ‘no gain/no loss’ basis so there is no CGT liability. This means that any gains or losses from the transfer are deferred until the asset is disposed of by the receiving spouse or civil partner. He or she will be treated as having acquired the asset at the same original cost as the transferring spouse or civil partner.
CGT And Transfers Between Divorcing Couples
Traditionally the no gain/no loss treatment of transfers also applied to divorcing couples – but only until the end of the tax year in which they divorce. After that, transfers were treated as normal disposals for capital gains tax purposes.
In our experience this approach presented issues for couples getting divorced because they could potentially face a significant tax bill in the immediate aftermath of their divorce. This was particularly the case when a divorce was finalised towards the end of the tax year.
Simplification Of The CGT Rules
In March 2023 the government announced that the Spring Finance Act 2023 would include a change or simplification of these CGT rules that affect divorcing couples. The changes we’ve summarised below apply to disposals that occur on or after 6 April 2023:
- Separating spouses or civil partners will have three years after the year when they cease living together in which to make transfers on a no gain/no loss basis. So the transfer no longer needs to be made by the end of the tax year.
- if the assets are transferred as part of a formal divorce or civil partnership agreement (which should usually be made as a court order), then the three-year time limit does not apply. It is open-ended.
- The provision will apply to Mesher orders and therefore will benefit spouses who are entitled to receive a share of the proceeds of sale of the family home when the sae is deferred until children are older.
In announcing the 2023 simplification of the CGT rules on transfers between divorcing couples the government said that the measure,
“…will especially benefit those parties involved in more complex proceedings, as it means that more time can be spent on the divorce considerations, rather than Capital Gains Tax considerations…”
In our experience potential exposure to CGT regularly plays a role in financial negotiations leading to a settlement. The very short window that divorcing couples had up until April 2023 to finalise the transfer of assets to mitigate CGT added additional stress.
The 2023 rules reduce this prospect of additional anxiety and, certainly in more complex cases as the government has indicated, inject a welcome degree of flexibility into those post-divorce transactions couples must undertake to implement their financial settlement.