Divorce can undoubtedly be one of the most difficult and stressful events a person might face; when a marriage ends there are a vast number of considerations at the forefront of a person’s mind such as arrangements for the children, where each party will live and how they will financially support themselves, independently of the marriage. Understandably, the tax implications of a potential financial settlement are not always given much thought.
What is Capital Gains Tax (CGT)?
CGT is essentially the tax payable on the increase (gain) of an asset’s value (capital) from the date of acquisition to the date of disposal. Disposing of an asset includes sale, a gift or transfer to someone, or swapping it for something else. CGT applies to assets such as property (provided it is not an individual’s primary residence and has not been used for business purposes), shares, most personal possessions worth more than £6,000 (such as jewellery, antiques or paintings), and business assets. The level of tax that will need to be paid by way of CGT will depend on the rate of income tax someone pays; higher rate tax payers will likely pay at a higher percentage than lower rate tax payers.
Allowances and Reliefs
CGT is only payable on the overall gain above your tax-free allowance. In previous financial years, Individuals had an annual tax-free allowance of £12,300, this was reduced to £6,000 on 6th April 2023 and will be further reduced to £3,000 at the outset of the 2024/2025 tax year. Depending on the asset, you may be able to reduce your CGT liability by claiming a relief or loss.
Assets transferred between spouses and civil partners who live together are often treated as no gain, no loss disposals and therefore there is usually no CGT liability.
What impact does separation and divorce have on CGT liability?
The rules regarding CGT for divorcing couples changed on 6th April 2023. Prior to the changes, separated and divorcing couples would only have until the end of the tax year in which they separated to dispose of or transfer any assets and subsequently rely upon the no gain, no loss relief. In practice, if a couple separated on 5th January, one spouse or civil partner would only have 3 months to transfer any assets to the other in order to avoid any CGT liability. The first months after separation are already extremely difficult and often parties have not even started to think about negotiations for financial settlement, let alone reached an agreement.
The new rules apply to disposals of assets that occur on or after 6th April 2023 and provide that:
- Separating spouses or civil partners now have up to three years after the year that they cease living together in which to make no gain, no loss transfers.
- No gain, no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves, provided that the transfer is subject to the terms of a financial divorce order or a formal divorce agreement.
- A spouse or civil partner who retains an interest in the former matrimonial home will have an option to claim private residence relief when the property is subsequently sold.
- A ‘transferor’ spouse or civil partner who is entitled to receive a percentage of the proceeds when the property is eventually sold, will be able to apply the same tax treatment to those proceeds when they are received, that applied when they transferred their original interest in the home to their former spouse or civil partner.
It is expected that these changes will alleviate some of the burden and stress experienced by individuals going through separation and divorce, however it is extremely important to obtain both legal and tax advice as to the potential implications you may face. Should you need further advice in relation to separation, divorce and financial settlement, our expert family team are here to help and advise you further.
Author: Stacey Williams