Capital Gains Tax on divorce and separation

In recent years, welcome changes have been introduced to divorce law which improve practicality and fairness within the system.

From 6 April 2023, Capital Gains Tax (CGT) will follow suit, with new rules providing couples with more time to consider how best to split their assets, without a potential charge to CGT.

The new changes are summarised below.

Transfer of assets at no gain no loss

From 6 April 2023 spouses and civil partners will be able to transfer assets between themselves at 'no gain, no loss' for:

• three years after the year in which the couple cease to live together as spouses or civil partners
• any period of time where the transfer occurs as part of a formal divorce agreement.

This improves the current position which left couples separating at the beginning of April with only a few days to arrange their affairs without incurring a potential tax liability.

However, it does not mean that CGT can now be ignored.

The 'no gain, no loss' rule effectively defers responsibility for any inherent gains, arising within the transferred assets, from one party to the other. The acquiring spouse will be treated as though they had acquired the asset at the date and for the amount that the transferring spouse originally did so, however long ago that might be. This means that the acquiring spouse takes on all potential tax liability (and not just the gain arising on the asset from the date they received it).

In order to determine the true value of assets transferred, consideration should therefore be given to the inherent gains and losses within those assets.

Extending relief from tax on the sale of the former matrimonial home

At present, where any individual’s only or main home is sold or transferred, Private Residence Relief (PRR) is available to mitigate tax on any arising capital gains. PRR is based on a person’s period of occupation as a proportion of their period of ownership of the property. It is only available for one home at a time. Where occupation and ownership periods are the same, tax is mitigated completely on the sale of an individual’s home.

However, where one party moves out of the former matrimonial home (FMH) following separation, the leaving spouse’s occupation and ownership periods are often no longer aligned. This leaves them exposed (but for a few exceptions) to a potential tax liability on the eventual sale or transfer of the FMH. This liability can increase where the leaving spouse transfers their interest in the FMH to the remaining spouse but retains an interest in the eventual proceeds of sale, arising some years into the future.

From 6 April 2023 the following rules will provide the leaving spouse additional opportunities to elect how their PRR is appointed between their FMH and any other home since leaving the FMH. These are:

• Spouses and civil partners who retain an interest in their FMH will be given an option to claim PRR on that property when it is sold (regardless of when they moved out if it, provided they do not claim PRR on any other property for that same period).
• Individuals who have transferred their interest in the FMH to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold, will be 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 ex-spouse or civil partner. For instance, if 100% PRR applied on the date of transfer, 100% PRR can be applied to the gain arising on eventual sale.

How Crowe can help?

Our private client team has expertise in assisting with a wide range of issues that may arise on divorce and separation, including:

• Computation of inherent gains within assets transferred on divorce or separation.
• Review of trust structures where distributions are required as part of settlement agreements.
• Review of family business structures to determine how best to transfer interests or extract value as required by a divorce settlement
• Early stage review of potential tax exposure on transferring matrimonial assets in order to plan a financial settlement tax efficiently.
• Single joint expert and shadow expert reports on the tax implications of transferring assets on divorce.

For help, advice or more information on how these changes affect you, please contact Rebecca Durrant or you usual Crowe contact.