New legislation will lessen capital gains tax burden on divorcing couples

02/08/2022

The existing capital gains tax (CGT) rules can throw up some nasty surprises for divorcing couples and add a layer of stress and complexity to divorce settlements. This CGT burden is set to reduce from 6 April next year if the draft Finance Bill 2022-23 comes into force in its current form. Teena Dhanota-Jones examines the existing law and proposed changes.

Separated parties to a marriage or civil partnership who transfer assets to each other are currently liable to pay capital gains tax if there is a gain. This can only be avoided if the transfer is made during the tax year in which they separate. Thereafter, capital gains tax is charged on any gains made on the sale or transfer of an asset (see further below on the family home).

Under the proposed new legislation, the period during which transfers are exempt from capital gains tax will be extended to three years after the end of the tax year when the spouses or civil partners cease to live together.

Also, at present, matrimonial assets (excluding the family home) transferred as part of a court order do not escape the assessment of capital gains tax. Under the proposed new legislation, any assets transferred between spouses or civil partners pursuant to a formal divorce agreement will be transferred at no gain or loss (and there is no time limit in which such transfers must take place).

Property transferred as part of a court order is currently exempt from stamp duty. There is no mention of stamp duty in the new legislation, and I would hope this stamp duty exemption remains when the changes to capital gains tax are introduced.

Private residence relief (PRR)

When someone sells their only or main residence, any gain is generally exempt from capital gains tax due to a relief called private residence relief (PRR).

A spouse or civil partner who remains in the family home after divorce or separation can claim PRR, which results in a zero gain or loss on a sale or transfer of the property for the purpose of capital gains tax.

Under the present law, the person who has left the family home (the non-occupying spouse or civil partner) can only claim PRR on the sale or transfer of the family home if such sale or transfer takes place within nine months of them leaving.

Under the new legislation, the non-occupying spouse or civil partner will be given the option to claim PRR on the sale or transfer of the family home when it is sold, even if this is more than nine months after they leave.

The non-occupying spouse or civil partner will have to decide whether to elect to keep their former matrimonial home as their principal residence and claim relief on it or elect for their new residence to be their principal residence instead.

Deferred interest in the family home

Some divorce settlements result in the transfer of the family home to one party, with the other receiving a percentage of the proceeds when that home is eventually sold. This is registered as a charge against the title to the home, much like a mortgage.

Presently, when the release of the charge is triggered on the sale or transfer of the property, capital gains tax will be payable on any gain. Under the new legislation, the individual receiving the deferred percentage of the proceeds will be able to apply the same tax treatment to those proceeds that applied when they transferred their original interest in the home to their ex-spouse or civil partner.

Conclusion

Overall, the legislation provides welcome savings to separating couples. In summary:

  • You can separate and delay court proceedings for up to three years. During those three years, you can transfer or sell assets between each other at no gain and no loss (see above in relation to the family home and PRR)
  • You can issue divorce or dissolution proceedings at any time, and provided the assets to be sold or transferred are detailed in a formal divorce agreement, the assets can be transferred at no gain or loss
  • A non-occupying spouse or civil partner can elect to use PRR on the sale or transfer of the family home at a later stage
  • Gains relating to a deferred interest in a family home will not give rise to a gain or loss.

I am sceptical about these changes. With so much money being saved by separating parties, there is likely to be a claw back by the government. Perhaps the current stamp duty exemption may be disapplied when transferring property subject to a formal divorce agreement.

Even with the introduction of these changes, expert tax advice should be obtained on potential capital gains tax and stamp duty liabilities when dealing with property and asset sales and transfers on divorce or dissolution of a civil partnership.

Disclaimer: The above is merely general guidance and should not be relied on as formal legal or taxation advice. We suggest you take professional advice before taking any action in relation to the issues discussed above. 

For advice on separation, divorce or dissolution, please Teena Dhanota-Jones at tdj@portner.co.uk.