Relaxation of CGT rules on separation and divorce

On 20 July, the Government published draft legislation for the Finance Bill 2022/23 which amends the capital gains tax (CGT) rules for transfers of property between separating spouses and civil partners.

It is well known that spouses or civil partners are able to transfer assets freely between each other without triggering an immediate CGT charge on the disposal of the asset (known as a “no gain no loss” transfer). However, couples who are separating or divorcing can be caught out by existing rules which extend this treatment only for the remainder of the tax year in which they separate. Transfers made from the following tax year are deemed to take place at market value and taxed accordingly.

In a May 2021 report on CGT, the Office of Tax Simplification (OTS) noted that “it is unrealistic to expect separating couples to have resolved their affairs by the end of the tax year of their separation” and recommended that the window for no gain no loss transfers be extended to allow separating couples at least two tax years after the separation event to make transfers, or an even longer period provided it is reasonable and in accordance with a financial agreement approved by a court.

The draft legislation published earlier this week is more generous than the OTS’ recommendations. Under new rules, applying to disposals made on or after 6 April 2023, separating spouses or civil partners will be able to continue to make transfers between each other on a no gain no loss basis for:

• up to three tax years after the tax year in which the couple cease to live together; or
• an unlimited period where the transfers are made in accordance with a formal divorce agreement or court order.

There will also be special rules introduced for individuals who maintain a financial interest in their former family home following separation, including the ability for the non-occupying former spouse or civil partner to claim principal private residence relief on a future sale of the property.

This is positive news for divorcing couples, giving them more time to reach an agreement on the division of their assets without running the risk of an unwelcome tax bill adding to the stress of separation.