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Capital Gains Tax and Divorce – changes from April 2023

During the Spring Budget it was announced that there will be some (much needed) changes to the rules on Capital Gains Tax (CGT) applying to divorcing couples.

The aim of the new CGT rules, which take effect on 6 April 2023, is to make the process for divorcing couples simpler, fairer, and less pressurised.

What is CGT?

CGT is the tax on the gain (profit) made when an asset is sold. If the asset has increased in value from the value it was acquired at, then a tax on this gain is payable.  CGT will be payable on assets such as property that is not the main home, shares, business assets, most personal possessions over £6,000 such as paintings for example.

What were the previous rules? (pre 6 April 2023)

The transfer of assets between spouses and civil partners who are living together are made on a no gain/no loss basis in any tax year in which they are living together. Essentially, CGT is not triggered on assets transferred to a husband/wife/civil partner provided they lived together from 6 April to 5 April the following year. Any gains or losses from the transfer are then deferred until the asset is disposed of (sold) and will later be subject to CGT. The no gain/no loss relief is therefore only available in relation to any transfers made in the remainder of the tax year in which separation happens.

For example, under the current regime, if a couple separated in February 2023, they would only have until 5 April 2023 to transfer assets to the other spouse, in order to benefit from the no gain/no loss relief. Such tight deadlines can be highly stressful for parties who are already going through an incredibly difficult time during divorce. This can also have a real financial impact on divorcing couples especially if there are delays in reaching a financial settlement due to various reasons.

What are the new rules? (post 6 April 2023)

Divorcing couples will:

  1. No longer be subjected to a time limit in respect of transfer of assets between themselves. This is provided, the transfer is subject to the terms of an order, including an order by consent, within financial remedy proceedings as part of the overall divorce or dissolution process.
  2. be given up to 3 years from the end of the tax year of separation whereby they can make no gain/no loss transfers.
  3. For the spouse who retains the family matrimonial home, be able to claim private residence relief when it is sold, providing they are able to meet the required conditions.

With the help of more time, the likelihood of couples being faced with a sudden large CGT bill reduces and instead payment of CGT can be deferred to a much later date or not be payable at all.

CGT annual exempt amount:

Pre 6th April 2023, the current capital gains annual exempt amount for individuals is £12,300.  This has now been reduced to £6,000  and will be further reduced to £3,000 on the 6thApril 2024.

If you have had a CGT report prepared before the Spring Budget, you might need to have it updated in light of the above changes.

The new changes are overall welcome and can hopefully have a positive financial impact for parties during divorce, and ‘lighten the load’ for couples who can then focus on other important areas stemming from their divorce.

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