Capital Gains Tax and divorce: New financial year, rules and beginnings

When it comes to separation and divorce, it’s never simple. And when Capital Gains Tax (CGT) is thrown into the mix, it can be hard to know where to start. With major changes to CGT rules for separated and divorced couples this year, Ian Haynes discusses everything you need to know if you’re in the process of a separation or divorce.

According to government statistics, there was just over 113,000 divorces in 2021. For many, this would have involved proceedings and agreements regarding the transferral of assets which may have triggered a CGT charge if assets were not transferred within the same financial year as the separation.

Having gained Royal Assent, there are new CGT rules you should be aware of. The new rules aim to introduce a system that recognises the degree in which married couple’s assets and finances are integrated. Here is everything you need to know about what this means in practice.

Gift of assets

When assets are transferred between “unconnected” parties, we call the disposal and acquisition ‘a bargain at arms’ length’, meaning that it has been agreed between both parties. Legislation exists to prevent those parties from placing an unrealistic value on the assets for their own benefit. This is likely to reflect a rise in value since the asset was first obtained which will result in a CGT charge on any profit gained on the sale or transfer.

Transfers between” connected” persons are considered to be at ‘market value’ regardless of the actual consideration paid or value placed on the asset. However where two people are married or in a registered civil partnership, the notional proceeds on the transfer of capital assets are treated as being equal to their original cost and therefore there is no CGT to pay. This is often known as the ‘no-gain, no-loss’ rule.

Gift of business assets

If you’re a business owner, you’ll need to know the rules that apply to the transfer of assets that are used within your business.

If you need to transfer shares in your own company or other business assets you own as part of your divorce settlement, it’s worth noting that if the company and the shares meets certain conditions (or the capital asset is broadly used in your business), you could be entitled to treat this as a transfer taking place at the cost of the asset, rather than the market value. If this was the case, there would be no immediate CGT to pay on the transfer. The tax charge is deferred until a later date, and this type of arrangement is often referred to as either a hold over claim or business asset relief.

This could be a consideration if you were separated or divorced some time ago, and other reliefs are not available and you wish to look for a more tax efficient way of transferring assets now. Of course, this is not guaranteed and professional advice with a qualified tax advisor is always advised to discuss the nuances of your unique situation and how this relates to changing legislation and rules.

The old rules

Historically, CGT rules have largely favoured married couples, affording them tax-free transferral of assets between themselves and the ability to combine two individuals CGT allowances in the disposal of a single asset. But when it came to divorce, it was often a different story. Previously, the there was only a limited window to deal with any asset transferral as part of a divorce settlement completely CGT free – up to the next financial year. Oftentimes this could leave individuals with a matter of months or weeks.

For example, if a couple officially separated on 3rd March 2018, they would have only had a matter of weeks before a CGT charge would have kicked in on the 5th April of that same year- marking a new financial year.

The new rules

In a bid for a fairer system, the government passed a new rule regarding CGT on the transferral of assets between individuals going through separation or divorce.

Although each case is different, broadly, the rule will come into effect from the first day a couple ceases to live together and will last until the end of the third financial year following the year of separation. During this time, any transfers of assets will receive the same ‘no gain, no loss’ treatment that was previously only available in the year of separation. For example, if you separated on the 10th July 2023, you will now be able to transfer assets until 5 April 2027 (the end of the third tax year following separation) to take advantage of this.

In addition, if you are beyond the three year window but still looking towards a divorce settlement, any matrimonial asset that is covered by a written agreement as part of those divorce proceedings will also now qualify for the same ‘no gain, no loss’ transfer, reducing any CGT to nil, regardless of how much time has passed since the separation date.

The new rules apply from 6th April 2023 onwards and interestingly, they have been drafted such that they can be applied retrospectively if needed. This will be particularly relevant if a couple separated two years ago but haven’t yet got around to dividing their assets up, or haven’t started divorce proceedings yet.

CGT in practice

Highlighted below are the varying CGT rates you’ll need to consider if you are dealing with a divorce or separation and you can’t benefit from the new rules. And whilst business owners can take advantage of the various allowances and reliefs already mentioned, it’s always best to speak to an advisor as early on as possibly in your proceedings to ensure that you don’t overpay on your CGT.

What you’ll need to pay will depend on what tax bracket you fall into.

Your taxable gain is added to your taxable income to determine the rate of CGT you’re liable to pay. If you have no taxable income, the first £37,700 of any taxable gain is charged at the lower rate applicable, with the balance at the appropriate higher rate.

Speak to an advisor

It’s always worth a conversation with a qualified tax advisor to determine the options available to you if you are currently dealing with separation or divorce proceedings.

Although some rules may not apply to some individuals, depending on when your separation took place, others will most certainly apply such as your personal CGT allowance of £6,000 that you can take advantage of this current financial year. Like many tax rules, this is set to change still in 2024.

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With a team of qualified tax and business advisors on hand, we can offer you the guidance you need to navigate the nuances of CGT in the separation or divorce process whilst keeping you informed of the latest legislative changes and how these apply to you and your situation.