DivorceChanges to the Capital Gains Tax (CGT) regime for divorcing spouses/civil partners are set to be introduced with effect from 6 April 2023.  Under the proposed new rules, an extended window will be available within which couples can dispose of assets as part of their financial settlement, without incurring a CGT charge at that point.  This offers a much fairer regime which will allow time for proper advice to be taken and due consideration to be given to all angles of a settlement and should result in CGT on financial settlements no longer being an issue for the majority of couples.  However the 2023 Finance Act, which received Royal Assent on 10 January, did not include legislation on these measures.  Where does this leave us?

The Finance Bill 2022-23 received Royal Assent on 10 January to become Finance Act 2023.  It is a brief document which enacts 11 measures.  Notably absent among those provisions is one relating to Capital Gains Tax (CGT) and separating couples.  It was expected that legislation addressing this would be included, given that a policy document setting out draft legislation was published in July and the measure was included in the Autumn Statement.  The proposed legislation, which is set to be introduced with effect from April 2023, makes changes to the CGT treatment of transfers of assets, and transfers of the couple’s main home, between divorcing spouses and civil partners whose partnership is to be dissolved.


Changes to CGT rules on transfer of assets between spouses on divorce

The current position is that transfers of assets between spouses in relation to a divorce or termination of a civil partnership, are treated as made on a nil gain/nil loss basis if the transfer is made in the year of permanent separation.  The effect of asset transfers on a nil gain/nil loss basis is that the spouse who transfers the asset does not have to pay CGT in relation to that transfer.  The CGT liability only arises later on, when the recipient spouse comes to sell the asset they receive.  If the transfer is made after the tax year of separation, current rules provide that the spouse who makes the transfer would be subject to CGT when the asset is transferred.


Current position

By way of an example, suppose that Henry and Catherine are divorcing in the current tax year 2022/23, having separated in 2020/21, and are currently finalising the financial settlement.  Catherine owns a portfolio of shares that were purchased in 2000 at a cost of £50,000.  The portfolio has a current market value of £200,000.   Catherine agrees to transfer 50% of the share portfolio to Henry as part of their financial settlement.   Under current rules, the transfer from Catherine to Henry is treated as being made at current market value, and not on a nil gain/nil loss basis as the year of separation has already ended.   In this situation, Henry would be treated as acquiring 50% of the portfolio at its current market value of £100,000 on the date when it is transferred to him.  A capital gain would arise to Catherine as at the date the 50% share of the portfolio is transferred to Henry.  Accordingly, she would be subject to CGT on the increase in value of £75,000 in the 50% share in the portfolio she has transferred to Henry.  As the transfer would be made for nil consideration, she would have to find cash from elsewhere to fund the CGT charge.


Position under new rules

The Autumn Statement confirmed that new provisions to extend the nil gain/nil loss transfer window for separating couples would be introduced, with effect from 6 April 2023.  Under the new provisions, there would be a window of up to 3 years from when couples cease to live together within which assets can be transferred between them on a nil gain/nil loss basis.  There is an unlimited timeframe for nil gain/nil loss transfers which are made under a formal divorce agreement, which in practice most couples would obtain via their solicitor as part of the divorce process.  If Catherine and Henry finalised their divorce settlement and the transfer of the 50% interest in the portfolio was made to Henry after 6 April 2023, the extension of the nil gain/nil loss window would apply and he would be treated as acquiring his 50% share in the portfolio at its original cost of £25,000.  Catherine would have no CGT to pay when she transfers the 50% portfolio interest to Henry.


Changes to Principal Private Relief (PPR) rules for divorcing spouses

There are further new provisions set to be introduced which would apply to PPR relief.  Our divorcing couple, Henry and Catherine, need to decide what to do with their family home.  They plan to continue to own it 50:50 and Catherine would like to continue to live in it with their children until the youngest has gone to university and this is set to be agreed and recorded in their divorce settlement.

Current rules mean that, if Henry moves out of the family home whilst retaining his 50% share and Catherine stays living there,  Henry would not be able to benefit from PPR relief for the period he does not live at the property, when it is eventually sold.  Catherine would benefit from PPR in full if she remains living in the property until it is sold.

The new proposed rules mean that spouses or civil partners like Henry, who still hold an interest in the couple’s former main home after divorce, will be able to claim PPR relief on any gain arising on the eventual sale, unless he has moved into a new Principal Private Residence.

A further extension of PPR relief is to be introduced for spouses or civil partners who have transferred their share in the couple’s former home to the partner who remains living in that property, but are entitled to a share in the proceeds when the couple’s former home is eventually sold.  Under current rules, relief will be given only for the period in which the departing spouse occupied the former home and for the last 9 months of ownership.

Under the proposed PPR relief extension, the departing spouse will benefit from the same tax treatment of the sale proceeds that they would have had when they transferred their interest in the home to the former spouse or civil partner.  Assume that, in our example, Henry had transferred his interest in the family home to Catherine but was granted a share of the proceeds on a future sale.  When the property is eventually sold, PPR relief would apply to the whole of any gain arising on Henry’s share of the sale proceeds on the basis that he had been living at the property until his interest was transferred to Catherine.


Why these changes matter

Under the current system, couples can face pressure to make rushed decisions to agree on a settlement before the end of the tax year of their separation in order to benefit from nil gain/nil loss transfers and mitigate CGT liabilities arising from disposals that they may need to make as part of their settlement.  The pressure is particularly great for couples who separate towards the end of the tax year.

The proposed measures to extend the window for transfers of former main residences and other types of assets on a nil gain/nil loss basis will offer a fairer process for the division of assets between couples who are separating or divorcing.   As matters stand currently, any delays in agreeing financial settlements or matters coming to Court may leave transferring spouses with significant tax liabilities in relation to disposals they make as part of the financial settlement on divorce.

It is important to remember that nil gain/nil loss transfers mitigate a CGT liability only at the point the transfer or disposal is made.  If assets are transferred and are later disposed of by the recipient at a gain, that gain would be subject to CGT in the usual way.  It is true that latent gains within any assets to be transferred will need to be considered to ensure an equitable result across the two parties, but the extension of the nil gain/nil loss window will allow time to consider how best to reach a fair and reasonable settlement taking into account the position in the round.

It is also important to remember that the changes only apply to spouses and civil partners, and will not apply to cohabiting couples.


Will the changes still be enacted?

There have been no announcements from HMRC or the Treasury to suggest that the measures will not be implemented.  It is believed that any measures that have been announced to come into effect from 6 April, but have not yet been enacted, will be included in new legislation to be passed after the Spring Budget.  However the uncertainty is unhelpful and clarification of the position from the Government would be welcomed.  If there are to be any delays in the introduction of the legislation this should also be clarified so that advisers can consider the timing of any settlement.  Likewise, if there are to be any changes to the proposals these will need to be clarified without delay to enable couples and their advisers to plan effectively.  If a couple is in the year of separation, and they are nearly at the point of being able to agree a settlement or anticipate being able to do so by 5 April, it may be sensible to agree a settlement if possible before then so as to be able to ensure that they are able to make any disposals or transfers between each other on a nil gain/nil loss basis, thus avoiding triggering a CGT liability at the point the transfers are made.


CGT rates have changed since this article was written and more up to date information can be found in our 2024 Spring Budget response.


The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...

Fiona Clark - Partner

E: fclark@goodmanjones.com

Tel: +44 (0)20 7874 8813

Fiona has extensive experience in advising HNWI and UHNWIs on UK tax matters. She works regularly with advisers in other jurisdictions to assist clients with overseas tax issues.

She is a specialist adviser to the globally wealthy, whether from a UK or overseas background, on a range of complex issues. You can read her full bio here.

Share your thoughts

Your email address will not be published. Required fields are marked *

All fields are required