Law Articles

New Capital Gains Tax Rules 11/08/2023

When married couples and couples in a civil partnership separate, there is a lot to think about. Who should start divorce and dissolution proceedings? Where will each party live? Who will the children live with? Who will take the dog?

Among the many practical points to be considered, parties should also think about whether there will be any capital gains tax to pay and, if so, what financial position will it leaves them in when the assets are redistributed.

Up until 5 April 2023, married couples and those in a civil partnership could have upon separation continued to transfer assets between them until the end of the tax year in which they separated. If they transferred assets outside the tax year of separation, the transfer (or disposal) would have given rise to a capital gain tax liability. In respect of the family home, if the departing spouse had not been living at the family home for more than nine months, the transfer/disposal of their share in the family home would have given rise to a capital gains tax liability. This all changed in April 2023.

The new rules are as follows:

• Dispositions between spouses and civil partners of any capital assets in the tax year of separation, or in the three immediate tax years following separation, will not trigger a capital gains tax liability. However, the three- year limit could be shorter if the final divorce order (previously known as Decree Absolute) is made before the three years expires.
• Any dispositions between spouses and civil partners of capital assets following a court-approved order will not trigger a disposal for capital gains tax at any time in the future (even if this is more than three years after the tax year of separation) if the disposal is pursuant to that court-approved order.
• Where a spouse or civil partner retains an interest in the family home after the divorce/dissolution is finalised, they will be given an option to treat that period of no longer residing at the family home as if it had been their only or main residence until the time of disposal and claim private residence relief when they receive their share in the family home. If the departing spouse or civil partner has acquired a new residence since leaving the family home and wishes to claim private residence relief on their share in the family home, they will lose the private residence relief on their new residence.

The relevant date to focus on is the date of transfer of the asset to ascertain whether the new rules apply, not the date of the parties’ separation.

International clients should be vigilant though. Individuals who are dual tax resident (tax resident in more than one jurisdiction), should seek specialist tax advice before reaching an agreement in respect of division of assets on divorce and dissolution as the rules referred to apply to residents in this jurisdiction and may not apply in other jurisdictions. A good example of this is individuals who are US citizens holding UK residential property. Despite the rules in the UK in respect of private residence relief, the US tax authority does not recognise a similar spousal exemption for disposals of residential property abroad. This can give rise to a gain and CGT liability in the US.

These new rules will go a long way in helping take the pressure off couples who are negotiating a financial settlement on divorce, especially for those couples who choose to divorce in the latter part of the tax year. These new rules do not apply to unmarried couples, only to those who are married or in a civil partnership.

For further information and advice on this issue, and other family law issues, please contact us for a free initial consultation on 01992 306 616 or 0207 956 2740 or email us.