Divorce or separation can be an emotionally trying time, and navigating the financial aspects of such a life-changing event can often feel overwhelming. Among the many considerations, the capital gains tax (CGT) implications for transferring assets between separating or divorcing couples have long been a source of complexity and uncertainty.
Previously, no CGT was imposed on asset transfers between spouses or civil partners who lived together. However, this tax relief did not apply if they divorced or separated. Fortunately, the government introduced new legislation in the Spring Budget released on 15th March 2023 to create a fairer and more practical system.
The new legislation increases the period during which separated and divorced spouses and civil partners are eligible to benefit from the CGT relief on transfers of assets between them.
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What Is Capital Gains Tax?
Capital gains tax is a tax imposed on the profit earned from the sale of specific investments. When you sell an asset like stocks, real estate, or even valuable collectables, the difference between the purchase price (known as the “basis”) and the selling price is considered a capital gain.
The capital gains tax rate and amount owed is calculated based on this gain and is paid to the government. This tax ensures that individuals who profit from selling assets contribute a portion of their profits back to the public funds.
Do You Pay Capital Gains Tax When You Divorce?
Typically, the transfer of assets between married couples is not subject to capital gains tax. However, during divorce, if the transfer happens outside a specific timeframe (known as the “tax year of separation”), it can trigger a capital gains tax liability.
What Is ‘No Gain, No Loss’ in Capital Gains Tax and Divorce?
“No gain, no loss” is a provision that can apply to transfers of assets between divorcing spouses. It means that when assets are transferred during the tax year of separation, there is no capital gains tax liability.
This provision recognises that in divorce, the transfer of assets is typically done without profit or loss. Therefore, no capital gains tax is payable at the time of transfer. This rule relieves divorcing couples, ensuring they are not burdened with an additional tax liability during an already challenging period.
Date of Separation vs Date of Disposal
The “date of separation” and the “date of disposal” are two distinct points in the context of capital gains tax (CGT) and divorce. The date of separation refers to the specific date when a couple decides to separate or end their marital relationship. This date holds significance as it establishes the beginning of the tax year of separation.
On the other hand, the date of disposal is the date when an asset is sold, transferred, or otherwise disposed of. This can occur during or after the divorce proceedings. In CGT and divorce, the tax rules provide certain benefits during the tax year of separation.
What Were the Divorce Rules in Relation to Capital Gains Tax Before 6 April 2023?
In 2022, the government announced plans to modify the capital gains tax regulations that apply when married couples or civil partners split. The new rules took effect on 6th April 2023.
Previously, once spouses or civil partners separated, the “no gain, no loss” treatment was only available for the remainder of the tax year in which the separation happened. After this period passed, the transfers were treated as regular disposals for CGT purposes.
In practice, this meant that a couple divorcing in March, for instance, could have had only a few weeks to settle their financial affairs to avoid a possible CGT liability. This took a lot of work to achieve, especially if many assets were at stake or the spouses or civil partners were waiting for court orders.
What Are the New Rules of Divorce in Relation to Capital Gains Tax?
Following requests from various organisations, the government has revised the CGT regulations for divorcing couples and civil partners as follows:
- When married couples separate, they will now benefit from the ‘no gain, no loss’ treatment for capital gains tax (CGT) on asset transfers for up to three years after the tax year of separation.
- If the couple gets divorced or legally separated by court order before the three-year period ends, the ‘no gain, no loss’ treatment will cease upon the finalisation of the divorce. That is, unless the asset transfer is part of an official divorce or court separation agreement.
- When assets are transferred as part of an official divorce or court separation agreement, no specific time limit is imposed on the application of ‘no gain, no loss’ treatment for asset transfers.
The new rule is a better approach, giving spouses more time to reach a formal divorce settlement without worrying about CGT liabilities.
The Matrimonial Home
The new law also changes how capital gains are computed on the sale of the former marital home when one spouse moves out and agrees to receive a percentage of the proceeds. This move allows that party to receive private residence relief on their share of the gain even though they did not live in the property before selling it.
Introduction of ‘No Fault’ Law
The new rules also include the ‘no-fault’ divorce law. This means that spouses can agree on the “irretrievable breakdown” of their marriage as the reason they want a divorce without blaming either party.
The couple can do this in a joint statement or by each spouse individually. Either partner can declare the marriage over by submitting a notice to the court, and they won’t be asked to produce evidence of wrongdoing.
The new law will make the process easier for divorcing couples and protect victims of domestic violence from being trapped by their abusive spouses.
Navigate the Complexities of Capital Gains Tax with DS Burge & Co
Navigating a divorce is challenging, especially regarding capital gains tax implications. The new capital gains tax rules for separating and divorcing couples offer a glimmer of hope, providing enhanced fairness and practicality during this difficult time.
At DS Burge & Co, we understand the intricacies of tax law and the emotional toll of divorce, especially when trying to agree on financial settlements. Our team of experts is here to offer guidance and support, helping you make informed decisions and optimise your financial outcomes. Contact us today, and we’ll help you navigate the path to a brighter financial future.