A Guide to Capital Gains Tax upon Divorce

The family home is often the biggest asset in many divorce cases.  Depending on the agreement reached between the parties involved, the property may need to be sold or transferred to one spouse, which can potentially attract capital gains tax (CGT) depending on the timing of sale/transfer and whether either party has already left the family home.

Other assets, such as shares, may also attract CGT if they are sold or transferred.

The Government have now announced proposed revisions to rules regarding CGT during separation and divorce, as set out below. If implemented, the new rules will be effective from 6 April 2023.

What is Capital Gains Tax (CGT)?

CGT is a tax on the profit you make when you sell or dispose of an asset that has increased in value.  Tax is due on the gain in value and not on the total consideration received.

A CGT liability commonly occurs in respect of the sale or transfer of shares or property as part of a financial settlement upon divorce.

Most individuals are entitled to a CGT annual exemption which is a tax-free allowance which reduces the taxable gain. The current rates of CGT are 10%, 18%, 20% and 28%.  Any chargeable gain that falls within the basic income tax rate band will be subject to CGT at 10% (18% for residential property) and 20% above the basic rate band (28% for residential property).

Do You Pay Capital Gains Tax on Divorce Settlements?

Under current rules, assets can be transferred between spouses and civil partners at “nil gain nil loss”, i.e. with no CGT consequences.  This relief continues in the tax year of separation.  For example, if you separate on 10 April 2022 you would have until 5 April 2023 to make any transfers free from CGT.  If, however, you separated on 1 April 2023, you would only have 5 days (i.e. until 5 April 2023) to make any CGT free transfers.  This can result in an extremely short window, especially given that resolving financial matters upon a divorce can often take approximately 18 months to resolve.

Private residence relief may be available if one party leaves the main residence/family home and their share is disposed of (either by way of transfer to the other party or the property is sold). In brief, the relief is available for the period that the property was the main residence and the last 9 months of ownership. The current rules can penalise the party who has left the family home in the event that any settlement takes more than 9 months to agree (which is very commonly the case).

However, specific relief may be available which allows private residence relief to apply to the whole period between leaving the property and the disposal if:

1. The couple separate; and
2. One party leaves the property; and
3. His/her share is subsequently transferred to the other spouse/civil partner as part of a financial settlement; and
4. The party who left the property does not make a private residence relief election for another property during the relevant period.

New Proposals

The Government has recently published proposals to change the rules that apply to transfers between spouses and civil partners who are in the process of separating.  The new proposals, which would be effective from 6 April 2023, would give parties up to three years in which to make nil gain nil loss transfers between themselves when they cease to live together and unlimited time if the assets are the subject of a formal divorce agreement (whether made by consent or through Court proceedings).

The proposals also seek to introduce new rules in relation to parties who continue to have a financial interest in the former family home following separation but have moved out to allow the other party to remain there for a set period of time, usually with the child(ren).  Under the new proposals, reliefs will be available to the non-resident party once the property is eventually sold.

Speak to our experts

When you are considering divorce and looking at the associated financial matters, it is always important to consider CGT early in the process.  You should take tax advice before moving out of the family home if possible, or as early as you can, in order to understand the potential CGT consequences.

Yasmin Kibble is a solicitor in the Family team and can be contacted on 01895 207 834 or yasmin.kibble@ibblaw.co.uk

Sehjal Gupta is a Private Client Tax Director at Menzies LLP and can be contacted on +44 207 465 1934 or sgupta@menzies.co.uk