Capital Gains Tax on Divorce

Lisa Pepper

Capital Gains Tax on Divorce: The Rules Since 6 April 2023

The rules around capital gains tax on divorce changed on 6 April 2023. The changes are good news for divorcing couples and may relieve a significant source of financial pressure from the divorce process. In this blog post, we outline the key rules on CGT on divorce and explain how they can affect your financial settlement.

The old rules (before 6 April 2023)

Before 6 April 2023, married couples and civil partners could transfer assets such as houses and flats or shares between themselves free of tax only if the transfer was in the tax year of separation. This is known as the ‘no gain, no loss’ rule. When the receiving spouse sells the asset in the future, they pay CGT as if they had purchased the asset at its original value.

So a couple that separated in December 2022 could only transfer assets using the ‘no gain, no loss’ rule up to 5 April 2023. After this date, transfers of property and other assets became subject to the usual Capital Gains Tax rules.

Many people criticised this very short time window for tax-free transfers. It forced some couples to stay in an unhappy relationship for longer than they wanted to, solely to wait for a new tax year to start so they could avoid a hefty tax bill.

The rules since 6 April 2023

Separating couples can now transfer assets between themselves at no gain or loss at any time up to the end of the third tax year after the one in which they stopped living together, or the date on which the court grants the divorce, if that is earlier. Transfers made under a formal divorce or separation agreement or court order have no time limit.

The rules also affect the tax relief you get when selling a family home. Often in a divorce situation, one spouse will move out of the family home and transfer their share to their ex-partner, deferring their share of the sale proceeds until the home is sold in the future, perhaps when the children turn 18 or move out.

A spouse who moves out is entitled to Private Residence Relief for the time they lived in the home and for the final nine months of their ownership. If they keep an interest in the home and it is sold more than nine months after they moved out, they can choose to treat the period after they moved out as if the home had still been their main residence, but only if all three of these apply: the sale is made under a formal divorce or separation agreement or court order; the home remains the main residence of their former spouse or civil partner from the time they move out until the sale; and they have not nominated another property as their main residence for that period. If they make the choice they cannot also claim Private Residence Relief on another home for that period, so it is not right in every case.

• Read our blog post Tax Implications for Divorcing Couples

What does this mean for divorcing couples?

The rules give couples more flexibility and more time to consider how to divide the assets. They reduce the financial pressure on couples who would previously have faced a significant tax liability.

Unfortunately, CGT on divorce rules still apply to asset transfers between unmarried couples.

Is there a best time to divorce for tax purposes?

Since 6 April 2023, the date you separate matters much less than it used to. You no longer need to separate close to the start of a tax year to make tax-free transfers between you, because transfers between spouses or civil partners can be made at no gain or loss until the end of the third tax year after the one in which you stopped living together, or until the court grants the divorce, if that is earlier. For example, a couple who stop living together on 1 December 2023 can transfer assets at no gain or loss up to and including 5 April 2027.

Transfers made under a formal divorce or separation agreement or court order have no time limit, so a financial remedy order can deal with them even after those three years have passed. A transfer outside these rules is generally treated as made at market value, which can produce a taxable gain.

Timing can still matter in two ways. Agreeing and recording the division of your assets in an order will keep your transfers within the no gain, no loss rule. And if one of you moves out of the family home, the final nine months of ownership are covered by Private Residence Relief, so it is worth taking advice before the home is sold. We recommend taking tax advice from an accountant if you have assets that may be subject to Capital Gains Tax.

How can we help?

If you want to understand how the capital gains tax divorce rules affect your situation, or if you need advice on dividing assets fairly during your divorce, speak to a specialist family law solicitor. Call our family team on 020 7485 8811 or complete the online enquiry form below.