Significant tax changes for divorcing couples coming up

The government has announced important changes to capital gains tax (CGT) rules on divorce or separation effective as of 6^th April 2023. It is anticipated that the Finance Act that confirms this change will become law during the Summer.

Under current law, all transactions between married couples or civil partners are classed as a “no gain/ no loss” by the Revenue. This means assets can be transferred between them without being subject to any tax. But when couples get divorced, the “no gain/ no loss” tax perk is lost on 6^th April (in the beginning of the next tax year) in the year that permanent separation takes place.

So if you separate on 5^th April, you literally have just a few hours to make use of the “no gain/no loss” benefit. Failure to do so could mean assets that have risen in value may suddenly be subject to CGT. Conversely, if you separate on 7^th April, the “year of separation” and hence exemption from CGT, extends for a further year.

The new rules allow a period of up to 3 years from the end of the tax year of separation to make such transfers on a no gain no loss basis. But if the transfers take place as part of a formal divorce arrangement, the time limit is effectively unlimited if the transfer is part of an official order.

This lottery effect of the current rules prompted solicitors to lobby the government for change for many years. A recent government consultation has paved the way for this important change following the introduction of no fault divorce last year. Changes to the divorce process, including a minimum period of 6 months between issuing the application and applying for a conditional order, encourages couples to have sufficient time to enable them to reflect, reconcile their differences and minimise bitterness.

Fortunately, when the family home is retained as the principal private residence by either one of the divorced couple or sold relatively quickly, under current rules it will normally be exempt from CGT. But with greater equality between spouses a feature of many divorce settlements, more substantial transfers of property, including widespread “buy-to-let” investments, mean that substantial CGT liabilities can arise, thereby devaluing the wealth of the spouse affected.

The new rules will permit a spouse leaving the home to exempt any gain on a later disposal to a third party in which the divorcing couple share the proceeds as part of the divorce settlement.

While these new changes will remove the time pressure that has previously compelled couples to divide their assets too quickly after separation, early planning, swift action and good legal advice are essential to achieving tax efficiency and ensuring assets are protected.

Couples contemplating divorce or dissolution of civil partnerships should obtain advice now to protect their assets as much as possible from tax while allowing sufficient time to arrange and implement a financial settlement on the divorce. We always recommend confirming the financial settlement reached by way of a separation agreement or financial remedy order reached by consent of both spouses.

If you would like advice on your specific circumstances, please contact the Family Team at BBS Law.