Divorcing couples may no longer need to settle their estate within a year

Aug 31, 2022

The Government has announced plans to relax capital gains tax rules (CGT) in divorce settlements, so spouses and civil partners will have more time to transfer their assets.

It’s on the table after the Office for Tax Simplification recommended the Government should extend the ‘no gain no loss’ window on separation.

Legislation will be introduced in the 2022/23 Finance Bill and, if enacted, will come into effect in April 2023.

For policy, that’s a relatively quick turnaround, so here’s everything you need to know about the changes and how divorcees will be affected. 

Current law

There’s no guarantee that the legislation will go through, and it’s doubtful you would want to delay a separation simply because of tax treatment, so we’ll quickly review the current law.

According to the current rules, the transfer of assets between spouses and civil partners living together are made on a ‘no gain or no loss’ basis in any tax year in which they live together.

Any gains or losses from the transfer are deferred until the asset is disposed of by the receiving spouse or civil partner. Even then, the person acquiring the asset will be treated as having acquired it at the exact original cost as the transferring partner.

But if partners separate, this rule only applies until the end of the tax year in which the separation happens. After that, transfers are treated as normal disposal for CGT purposes. 

Proposed changes

The main change the Government would see is separating spouses and civil partners for three years to make no gain or loss transfers after they stop living together. 

Furthermore, no gain or loss treatment will apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement.

These changes will not change the obligation to pay CGT when an asset is eventually sold, but they will in effect allow more time to pay.

A spouse or civil partner who retains an interest in the former matrimonial home will also be given the option to claim private residence relief (PRR) when it is sold.

PRR is a relief from CGT and applies to your main residence and often results in no CGT being due on its sale.

Currently, when a spouse moves out of the family home, they are often no longer eligible for the relief, which can cause a major future tax liability if the main home is retained for a significant period of time.

Need help?

According to the Government, the measure will make the divorce process easier for splitting partners who are distributing assets between themselves. It added:

“The extension will also help avoid further depletion of household income or existing accumulated household wealth through dry tax charges for those who meet the new time period.”

However, like almost everything tax-related in the UK, you shouldn’t underestimate the new system’s complexity. 

If you’ve recently separated and need help with your tax obligations, don’t hesitate to get in touch with our tax team.