Capital gains tax on divorce

Decision-making during a divorce is never easy.  There are a myriad of big questions to resolve such as your housing needs, arrangements for access to your children (if you have them) and the division of matrimonial assets.

However, the capital gains tax (CGT) implications of a potential divorce settlement or final court order are rarely assessed in as much detail as they should be, given the potential impact on the overall cost of divorce.

In a marriage or civil partnership, assets can be transferred without any CGT tax until the point of separation. However, until this tax year, the transfer between divorcing spouses had only been CGT exempt for transfers that occurred within the tax year of separation.

Recent developments in CGT on divorce

From the 6th April 2023, new rules apply to the transfer of assets between spouses and civil partners who are in the process of separating. The measures mean that they now have up to three years in which to make CGT exempt transfers of assets following separation.

If the assets are the subject of a formal divorce agreement, the CGT exempt period is then unlimited. These changes in tax treatment are in line with the recommendations made by the Office of Tax Simplification.

It also introduces some special rules that apply to individuals who have maintained a financial interest in their former family home following separation. They are now entitled to receive a percentage of the proceeds when that home is eventually sold. They can also apply the same tax treatment to those proceeds that applied when they transferred their original interest in the home to their ex-spouse or civil partner.

Reason for capital gains tax on divorce changes

These new measures make capital gains tax rules much fairer. They give spouses and civil partners in the process of separating more time to transfer assets between themselves without incurring a possible tax charge.

Under the previous rules, no gain/no loss treatment was only available for any disposals in the remainder of the tax year in which the separation happened. After that, transfers were treated as normal disposals for capital gains tax purposes.

Impact of changes

Those parties involved in more complex divorce proceedings will benefit the most, as it means that more time can be spent on the divorce considerations rather than capital gains tax considerations.

The extension will also prevent further depletion of household income or wealth through tax charges for those who meet the new time period. There will be similar benefits for those transferring assets that are listed in a divorce or separation agreement.

Seek expert advice

Divorce can be a stressful experience, and depending on the complexity of the case it can take anywhere from six months to two years to complete. Having the support of a professional tax and financial adviser can help to alleviate some of your concerns.

The adviser will be able to offer impartial advice and facilitate the division of assets. This is equally important post-divorce to ensure that assets are invested tax-efficiently and that financial plans remain on track to re-build wealth.

If you would like to speak to one of our tax specialists today about the implications of CGT on divorce, please get in touch.

(Tax treatment depends upon individual circumstances and is based on current UK tax legislation, that is subject to change at any time.)

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.

Richard Gillham

Financial Planner

Richard joined Progeny in January 2021, following more than 20 years in investment management, primarily with Legg Mason.

Learn more about Richard Gillham