Divorce and Tax: New Changes Proposed

The government has proposed changes to the way Capital Gains Tax (CGT) is calculated on separation or divorce. In this blog, family director, Julie Bennett, looks at the proposed changes and how these changes will impact spouses and civil partners upon divorce and dissolution.

Current Law

Section 58 of the Taxation of Chargeable Gains Act 1992 allows spouses and civil partners to make a transfer of assets on a “no gain or no loss” basis in any tax year in which they are living together and therefore enabling the parties to transfer assets to one another without attracting a CGT liability.

When spouses or civil partners decide to separate, the “no gain or no loss” treatment is only available to transfers in the remainder of the tax year in which their separation happens. For example, if the couple decide to separate in January 2022, only transfers that happen on or before 5^th April 2022 will be subject to the “no gain or no loss” rule and the receiving spouse or civil partner will acquire ownership of the asset at the original base cost. From the 6^th April 2022, any transfer would then be treated as a normal disposal conducted at the market value and could attract CGT.

This could therefore mean that the parties are liable for a rather large CGT bill as current rates of CGT start at 10% and could rise to 20% and the disposal of a residential property may also attract a higher rate of 18% or 28%.  

Draft Finance Bill 2022/2023

The implementation of the new changes is proposed to come into effect on 6^th April 2023 but is still to be confirmed.

The new legislation would mean that instead of having until the end of separation tax year, spouses and civil partners would be given up to 3 years after they cease to live together in which to make transfers that qualify for the “no gain or no loss” rule.

It also provides spouses and civil partners with an unlimited amount of time to benefit from the “no gain or no loss” rule when transferring assets between themselves if the transfer is made because of a formal divorce agreement.

Impact

The impact of these changes is a positive one. It would mean that there is a fairer process for separating and divorcing couples who are distributing assets between themselves by reducing their liability to pay CGT which could be unexpected and significant.

It would also ensure that money in the matrimonial pot for division is not depleted and so the parties have more capital to be able to rehouse themselves post-separation, divorce or dissolution.

Need some advice?

Detailed tax planning is still required when considering the split of assets between a separating couple. If you're looking for expert legal advice or have any questions in relation to issues raised in this article, please contact the Family Team on 01242 586836.