Proposed Changes on Capital Gains Tax for Divorcees

It’s universally accepted that most couples who get married go in hoping that their union will be, as the saying goes, “’til death do us part”. However, we know that this is not the case for everyone and unfortunately, many marriages come to an end for one reason or another. Divorce is a common occurrence in the UK and as of 2021, it is estimated that 42% of marriages end in divorce.

The process of divorce is an exhausting one. It is emotionally draining for all involved, be that the couple themselves or their family. It also, majority of the time, ends up being an expensive process – solicitor involvement, the splitting of assets and the cost of starting over again.

Draft legislation has been written up and proposed regarding Capital Gains Tax (CGT) for divorcees, to be introduced in the 2022/23 Finance Bill which will benefit thousands of couples going through the process of divorce.

How does Capital Gains Tax currently work in divorce?

CGT is applicable on majority of assets in the event of divorce, from property to investments to business interests. Where assets are jointly owned, the likelihood is that these assets will be split or transferred, meaning that they are potentially considered as a disposal of an asset for CGT purposes.

The current rules state that CGT on transfer of assets as a result of divorce are exempt if they occur in the same tax year of separation – this is known as a “no gain / no loss” basis. However, if the transfer of an asset is not complete and proceedings continue into a subsequent tax year, then the benefit of no gain / no loss is lost, and CGT becomes applicable to both individuals.

One of the main issues here is when marriages breakdown later in the tax year, leaving very little time to get any transfer of assets in time to benefit from no gain / no loss and even some couples delaying proceedings to maximise the no gain / no loss window. To put this into perspective, the average divorce takes between 4 and 6 months.

Another concern is also around the transfer of main residence. As it stands, where a spouse departs the matrimonial home and wishes to transfer their share of the property, or alternatively, the property is sold to a third party, then CGT will be applicable and there is no benefit of Principal Residences Relief (PRR).

What are the changes going to be?

The draft legislation states that couples will have a three-year window starting from the tax year after separation to benefit from no gain / no loss transfers. This will give divorcing couples more leeway to transfer assets without the worry of a tax charge.

Furthermore, there will be an unlimited timeframe for no loss / no gain where couples are subject to a formal divorce agreement as ordered by the court.

Finally, where the main asset of a couple is the family home, Principal Residence Relief (PRR) will now apply to both spouses, whether to a spouse who has left the matrimonial home or on sale to a third party. This will be of benefit to those individuals who maintain a financial interest in a home but have ceased to live in the matrimonial home for some time, assuming that it keeps within the proposed timeframes.

When are the changes coming into effect?

The changes will come in play for assets that are transferred on or after 6th April 2023.

How can Alexander Grace help?

Our experienced Independent Financial Planners keep up to date with the changes in taxation and the ever-changing financial climate. We appreciate that divorce is a stressful time for all involved and we want to make the lives of our clients much easier by taking some of the workload off you and ensuring that your finances are in the best possible position for you to move forward.

Please contact us on info@alexandergrace.net or 01675 443189.

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CV7 7HE