Changes to Capital Gains Tax – what does this mean for divorcing couples?

On 15 March 2023, Chancellor of the Exchequer, Jeremy Hunt announced some significant changes to the way capital gains tax is approached on separation and divorce. These long-awaited changes mark a turning point in how, and critically when, spouses are able to transfer assets.

As of 6 April 2023, spouses will have up to three years to make a transfer on a “no gain/no loss” basis from the date when they cease to live together and, perhaps most significantly, benefit from an unlimited time to transfer assets if this is subject to a formal agreement in the context of divorce and financial remedy proceedings and/or preferential taxation treatment on the eventual sale of the property.

Separating spouses will soon:

1. Have three years after the year they separate and cease living together in which to make a “no gain/no loss” transfer
2. Have an unlimited time to make transfers on a “no gain/no loss” basis pursuant to a financial remedy order in the course of divorce proceedings
3. Have the option to claim private residence relief on the sale of the former matrimonial home if they have retained an interest in it
4. Apply for the same tax treatment to the proceeds they receive, when the former matrimonial home is sold, in instances where they have transferred their interest in the home and are entitled to receive a percentage of the proceeds of sale.

At present, spouses are only able to make a “no gain/no loss” transfer within any tax year in which they were living together regardless of whether they are involved in financial remedy proceedings connected to a divorce or dissolution.

This poses a significant issue for spouses in instances where one party has moved out of the family home or where there are young children involved and the family home is be retained, but it is not possible for one spouse to buy out the other’s interest. Owing to the capital gains tax liability on sale, which may be several years after the date of separation, the liability can represent a significant percentage of the equity in the property. In turn, this can substantially deplete the funds available to a party to rehouse.

As of the 2023/2024 tax year, the options available to couples will increase exponentially, offering greater flexibility to separating spouses and civil partners. Something as simple as retaining a family home whilst the parties’ children are in their minority, in the knowledge that a capital gain will not be accruing, will be of comfort to many. These changes are long overdue, and are changes which I, along with my fellow family lawyers are pleased to see.

I am hopeful that a fairer approach to capital gains taxation, will provide for a much more amicable forum for separating couples to agree the financial arrangements stemming from their separation. Coupled with No Fault Divorce which came into effect on 6 April 2022, the seismic shift in the laws surrounding divorce and dissolution shows that legislatures are listening to the needs of the modern family and the way ahead is focussed on minimising the financial cost and emotional impact of separation, in the hope that former spouses and their children may look ahead to a brighter future.

Eleanor Pollard is a Solicitor in our Brighton office.