Capital Gains Tax changes – what do separating couples need to know

For couples going through separation, it can be a time-consuming and sometimes stressful experience, even without having to navigate tax liabilities. At Monahans, we ensure that our clients understand the tax landscape and work hard to keep them informed about any HMRC rules that might impact them.

With this in mind, we wanted to give a snapshot of the rules impacting divorcing couples.

In April 2023 HMRC brought in changes intended to make things fairer for spouses/civil partners who are separating. The date of the disposal of an asset, rather than the date of separation, will determine whether the new rules apply.

Transfers of assets before separation during marriage/civil partnership

For CGT purposes, the transfer of assets between spouses/civil partners are treated as a no gain/no loss transfer. This essentially means that an asset is passed to the partner and treated as if they had originally purchased it. CGT will only become relevant if/when the receiving partner comes to dispose of the asset.

The previous rule: Previously when a couple were divorcing or separating, the pair only had until the end of the tax year in which they separated to make use of the ‘no gain, no loss’ transfers of assets.

From the 6^th April following the separation, the couple may be subject to CGT and any transfers made before the decree absolute or final order was issued, (essentially until the divorce was finalised) would be deemed as a connected party transfer. This means the asset would be deemed to have been sold at market value (even if no consideration is received), potentially giving rise to a tax charge.

The rule opened many people up to onerous tax liabilities when they were transferring assets during the separation and divorce process, particularly if the process was complex or had begun at a particular date throughout the year.

HMRC have now made key changes to the above rules.

The new rule: Spouses and civil partners are no longer required to transfer all capital assets in the tax year of separation. Instead, they will now have three immediate tax years following separation before they will be liable for CGT (for transfers to each other).

Furthermore, if a disposal is in accordance with a court order, CGT will not be payable. This is even if it is more than three tax years after the tax year in which a couple separated.

This is a significant change, and as always, while a couple is separating, it's crucial that they have regular conversations with their advisors to make sure that they understand the rules and their potential implications.

Please remember that if sales are made to third parties post transfers CGT may still be payable.

Rules for residences
There have also been changes in the rules surrounding main residence relief.

The previous rule: Previously a spouse or civil partner who still retained an interest in the couple’s former home after moving out could not claim main residence relief in full on a future disposal when it was sold. Nor could they if they were entitled to receive a share of proceeds on a future sale of the property after transferring their interest to their former partner.

The change: Individuals retaining a share in the former matrimonial home now have the option to claim main residence relief in full if they dispose of it in the future.

Subject to certain conditions, you will be able to treat the period you no longer lived in the home as if it had been your only or main residence until the time of sale. The same treatment will also apply if you are entitled to receive a percentage of the proceeds when your former home is eventually sold.

So, when does formal separation take place?

The year of separation is the tax year in which you stopped ‘living together’. According to HMRC you are treated as living together unless separated by:

• Court Order.
• Formal deed of separation executed under seal.
• In such circumstances that separation is likely to be permanent.

Separation can exist even where you both continue to occupy the family home.

When living in the same property ‘living separately’ is considered to apply when you no longer do any of the following things, as examples:

• Sleep together.
• Cook or eat together.
• Watch television together.
• Carry out domestic chores for each other (for example: washing & ironing clothes).

It’s important to note that we would always advise that those with overseas assets, non-UK resident or non-domiciled individuals seek specialist advice as soon as possible.

If you have any questions or would like to discuss the above, Get in touch with one of the team today. You can download the above video as a PDF here.

Jessica Long