Hot on the heels of the introduction of no fault divorce, further developments are taking place that will have repercussions for separating couples in the years to come. In late 2022, changes to Capital Gains Tax (CGT) were announced*. For separating couples of high net worth, this will have an impact across the entire division of significant assets, particularly around how Capital Gains Tax on property after divorce is approached and the ‘no gain no loss’ transfer to spouse.
Let’s take a look at the pre-existing rules before considering the full implications of the changes for any couples who are going through divorce or separation.
Capital Gains Tax on Divorce: How It’s Calculated
Capital Gains Tax is applied against any assets that are disposed of or sold, but is most commonly associated with properties, such as the family home. However, it can also be applied to a broader range of other high value assets, including luxury items like antiques and artworks, and against shares and investments.
Effectively, CGT calculations are based on the difference between the original value of an item and its value when sold or otherwise disposed of. For instance, if a home that had originally cost £300,000 was sold during a divorce for £400,000, the amount liable to attract CGT would be the difference of £100,000.
Prior to the proposed changes to Capital Gains Tax, the Annual Exemption Allowance (AEA) stood at £12,300 (or £6,150 for trusts). The amount of CGT payable being partly determined by factors such as the payer’s rate of Income Tax, the total value of the financial gain, and the payer’s amount of taxable income. This makes the basic tax rate either 10% or 18%, with parties in a higher tax bracket liable for a 28% levy on properties and 20% on other significant assets.
If you’re going through a divorce or separation and are concerned about CGT, it’s important to speak with a law firm or accountant that can assist.
Capital Gains Tax on Property After Divorce
Historically, the rules around Capital Gains Tax on divorce have been hugely influenced by the timing of the disposal of assets. Prior to the proposed April 2023 overhaul, any couples who separated towards the end of a tax year found themselves with a very short window in which to resolve their affairs without incurring a hefty tax burden. Therefore, any parties who didn’t pre arrange the timing of any transfers of assets between themselves might have exposed themselves to larger CGT contributions.
The changes to Capital Gains Tax aim to make the process for divorcing couples fairer and the timing less critical.
With that established, let’s take a look at the existing rules across a few common scenarios among finances after separation, before discussing the amendments that should soon come into play.
Capital Gains Tax Before Separation
In this scenario, no CGT would be applied. If, for example, a husband transfers a property to his wife, the property is seen to be hers and the current (increased) value of the house will not be taken into account. The asset is seen as being part of a ‘no gain no loss’ transfer to spouse at the original market value (and no more).
It’s worth noting at this point that ‘no gain no loss’ is used to describe a situation where a transaction does not lead to either a profit or loss for any of the the parties involved. In such cases, CGT is not payable, as there is no gain or loss to HMRC.
Capital Gains Tax on Divorce After Separation
In this case, much would depend upon when the separation takes place during the financial year. The main points of consideration are whether it happens before or after the 5th of April, and if the Final Order has been issued. Therefore, the status of the high value asset as a ‘no gain no loss’ transfer to a spouse is largely determined by timing alone.
Should a couple have lived together during the tax year preceding their separation or divorce, they are able to make no gain no loss transfers between themselves. Therefore, if a couple separated in the tax year before the 5th of April ‘23, that date would have been the cut off for transferring assets without incurring CGT.
Capital Gains Tax on Divorce Following an Eventual Property Sale
It’s not uncommon for divorcing couples to make financial and living arrangements stipulating that one party can continue to live in the family home until a predetermined point in the future. A typical example of this might be where both parents agree that the shared property will be sold once their youngest child turns 18. In this scenario, the resident parent would be able to reduce their CGT obligations via a Principal Private Residence (PRR) relief, whereas the non-resident would be liable for CGT for the period between moving out and the eventual sale.
What Are the Main Changes to Capital Gains Tax?
As of the 6th of April 2023 it is proposed as per the bill set out above that, separating partners and spouses will see some fundamental changes to Capital Gains Tax on divorce. As with the overhaul of no fault divorce, these changes are intended to offer extra fairness, flexibility, and practicality at what is often a very difficult time. The new rules will give former partners much more time to decide how best to approach the financial side of divorce and separation, with the main takeaways being:
No Gain No Loss Transfer of Assets: Civil partners and spouses will be able to transfer assets to each other for up to three years after they stop cohabiting and at any point as part of a divorce agreement. This helps couples who separate close to the end of a tax year, so that they do not have to make decisions in a very short window of time re the transfers of assets to mitigate CGT.
Changes to Private Residence Relief (PRR): If civil partners/spouses retain an interest in their former matrimonial home, they may still be able to class the period during which they didn’t live in the property as being their primary residence up to the point of a sale. This would allow them to make a PRR claim.
Ultimately, the changes to Capital Gains Tax have largely been welcomed by divorce and separation solicitors across England and Wales. Historically, many couples discovered that they had a vanishingly small timeframe to benefit from a no gain no loss transfer to a spouse. However, the majority will now have at least three years to decide what works for them and how best to navigate Capital Gains Tax on property after divorce.
Despite the positive nature of these changes, it’s strongly recommended that anyone going through divorce or separation enlists the services of an experienced family lawyer and accountant in these circumstances. Taking advice about your unique set of circumstances could greatly increase the chances of understanding tax implications and getting a satisfactory outcome in the days and months to come.
Major decisions such as these, where a tax liability could crystallise, should only be made when full advice has been taken and your unique situation explored.
To learn more about the main features of high net worth divorce, you can read our blog on the subject here.
*At the time of writing, the Finance (No 2) Bill will have its Report Stage and 3rd Reading on 20th June 2023. We will then know with certainty whether the changes proposed to take effect from April 2023 will take full effect. You can track the bill using this link.
Handle Capital Gains Tax on Property After Divorce With Lowry Legal
Lowry Legal is a 360 degree law firm that takes a holistic approach when representing clients with substantial wealth and considerable assets. We recognise that the division of assets is a major feature of any high net worth divorce and we have a strong track record of helping our clients reach an outcome that works for them. Whether you are expecting an amicable resolution or a more complicated settlement, we have the expertise to guide you towards your preferred goals.
Our dedication to clients means that your best interests will be at the centre of our strategy throughout the various steps in the divorce process. We adopt a practical and straightforward approach to ensure that you appreciate all of the options at your disposal and we prioritise straightforward dialogue at all times.
To speak to one of our specialist divorce lawyers, contact us today, or email firstname.lastname@example.org.