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Divorce or separation can be a difficult and emotional time, and sorting out financial affairs can add to the stress. One of the areas that can be particularly complex is that of capital gains tax (CGT). Capital Gains Tax is tax that must be paid on assets which have accrued value since purchase such as second homes and investments.
Until 6th April 2023, spouses and civil partners were able to transfer assets between themselves without incurring a Capital Gains Tax liability up to, and including, the year of permanent separation.
After the year of permanent separation, any transfer of assets was subject to CGT at the market value rate for the assets being transferred. That liability often fell due at the time of transferring assets following divorce, especially if the divorce took time to complete or parties separated for some time before dealing with their finances.
Since 6th April 2023, the rules became a much more favourable. The separating spouses or civil partners will be given:
- Up to 3 years, after the year of separation, to make no gain no loss transfer of assets meaning CGT would not be payable on those assets.
- Unlimited time to transfer assets when they are subject of a formal divorce financial order.
- A spouse or civil partner who retains an interest in the former matrimonial home will have the option to claim Private Residence Relief when it is sold.
- Individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner, and are entitled to receive a percentage of the proceeds when that home is eventually sold (often referred to as a Mesher Order), will be able to apply the same tax treatment on the receipt of those proceeds that applied when they transferred their original interest in the home to their ex-spouse or civil partner.
The new rules are a welcome change and elevate some of the stress imposed upon spouses and civil partners when separating. The period increasing from 1 year to 3 post separation, and the additional time given for financial orders and Mesher orders for tax relief means that couples can transfer assets such as property, shares, and investments to each other without incurring a CGT charge meaning there will be more in the pot to meet the needs of the parties and children.
It is worth noting that while the new rules can make the process of dividing assets easier, they may not always be the most tax-efficient option. For example, if one spouse has unused capital gains tax allowances or losses, it may be more tax-efficient to sell the asset and use the allowances or losses to reduce the CGT liability.
There are also issues to consider such as where cash is needed, and assets are disposed of to third parties, this will fall outside of the exemption and could incur CGT. In addition, if the asset is not a UK asset, it may not fall into the UK tax exemptions. Specialist tax advice can be taken from an independent financial advisor if needed and your lawyer will address this with you if they feel it would be beneficial for you to obtain such third-party advice.
If you have any queries about the changes to laws around divorce or need advice on any family law matters, please speak to our family team on 01932 852 057 or by emailing info@meadowsryan.com
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