Changes to Capital Gains Tax (CGT) rules for separating couples

Family - 4 minutes read

Lauren Pilcher explains the changes to the CGT rules that apply to separating couples.

As you may have seen in the news, the CGT rules that apply when a married couple or those in a civil partnership separate have changed. The legislation is still awaiting royal assent, and this is expected to happen within the Finance Bill in the July budget. However, the changes to the rules are expected to be backdated, with effect from the start of this tax year, so it is important that couples are aware of these changes and the implications for them and their finances now.

What the old rules were

CGT is charged when an asset is disposed of. There are exemptions which mean that CGT will not be charged and the key one for most separating couples is the exemption that applies to your primary residence (principal private residence relief).

When a couple are happily married/civil partnered any transfers of assets between them are exempt from CGT (this is often called a ‘no gain no loss’ transfer). This means that the CGT charge is effectively postponed, until the spouse/civil partner who received the asset later disposes of it.

Once a married couple or those in a civil partnership separate, the ‘no gain no loss’ exemption only applies to the tax year in which they separated. Therefore, under the old rules, couples have at best a year (if they separate at the start of a tax year) to transfer any assets between them that could be subject to CGT in order to make use of the exemption. It is usually advisable that assets are not transferred until there is a legally binding financial order dealing with all assets.

This puts huge pressure on couples to start and progress discussions about the division of their finances/assets at a time when they are potentially still coming to terms with the breakdown of their relationship. This can often lead to increased tensions.

What has changed

The changes to the CGT rules will allow married couples and those ending their civil partnerships a lot more time to discuss their financial settlement, and implement the agreement. The changes allow for the ‘no gain no loss’ rule to be extended for 3 years from the end of the tax year of separation. If couples separate towards the start of a tax year, they will have nearly four years to transfer assets with ‘no gain no loss’. If you separate close to the start of a new tax year, it will be important to consider the date of your separation, to ensure that you know when your ‘no gain no loss’ relief ends.

If the transfer is made in accordance with a financial order, and confirmed by the Final Order of divorce, this exemption is extended further as these transfers will also be able to benefit from the ‘no gain no loss’ rule indefinitely. Importantly, your transfers must be subject to a financial order to benefit from any extension to the three year rule.

These changes are a much needed amendment to the tax arrangements on separation and finally recognise the time and space couples need to deal with all elements of their separation clearly. We have no doubts that they will be of great benefit to all those who find themselves separating.

There are also additional changes which will be of huge benefit to those who may have separated some time ago but still own property together with their ex. If you still own the property jointly, you will have the option to claim principal private residence relief when the property is sold (including any period that you did not live at the property). Financial advice may be required if you have purchased a new property post separation, as this relief can only be claimed on one property, so you will be unable to claim principal private residence relief on your new property, for the period that you have claimed it on the family home.

Alternatively, if you have transferred the property to your ex, and retain an interest by way of a charge (known as a Mesher Order), you will be able to apply the same tax treatment when you receive the funds (i.e., when the property is sold or you receive a lump sum payment from your ex), that applied when you originally transferred the property. In many cases this will lead to a significantly reduced tax bill (and perhaps even remove any tax liability).

If you are unsure about whether you could be subject to any CGT charges, you should speak to an accountant or specialist tax advisor to obtain advice for your specific circumstances.

Talk to us

If you would like any advice about divorce, dissolution of a civil partnership, or separation, then do not hesitate to get in touch with our highly experienced family law team. We are dedicated to resolving matters as amicably as possible and every solicitor in our family team are members of Resolution which means we have a duty to reduce conflict wherever possible.