The division of the matrimonial home and other properties between couples on divorce may trigger a capital gains tax bill ("CGT"). The Government has announced changes to the CGT rules which seek to make them fairer for couples who are in the process of separating.

CGT is a tax charged on the transfer (or sale of) a property. It is a tax on the increase in value since the property was acquired. CGT is charged at higher rates for residential properties than other assets, being charged at 18% (for basic rate tax payers) or 28% (for higher rate tax payers). In the current 2022/23 tax year, the first £12,300 of gains for each of the couple is CGT free.

When a married couple (or civil partners) are living together, any properties transferred from one to the other pass CGT free. This is known as a "no gain or no loss" transfer. This means that any gains or losses from the transfer are deferred or "held over" until the asset is disposed of by the receiving spouse, who will be treated as having acquired the asset at the same original cost as the transferring spouse.

The current position

When a couple separate, the CGT relief is only available until the end of the tax year of separation. After that the relief is lost. The CGT relief for spouses is therefore only available for a short time. This is a particular issue if a couple separate near to 5 April, when it can be impractical to expect agreement to be reached in time to avoid the CGT.

There is usually no CGT where the principal private residence is transferred or sold. This is known as private residence relief (PRR). However, where one spouse moves out, they can only claim PRR within a period of 9 months after they move out. This is again a short timescale. If the couple decide to sell the house, then relief from CGT on the gain made on the sale will only apply if one spouse remains there and the sale is completed within 9 months of the other moving out.

The proposed change

The Government has proposed from April 2023 to give divorcing couples more time. From 6 April 2023, divorcing couples will have up to three tax years after the tax year they cease to live together to transfer assets between each other without incurring CGT.   This means couples have an extra three years to divide assets without incurring immediate CGT.

PRR will also be changed to some extent, however the proposed changes are more complicated and require further advice.

This change has not been passed and may not be passed as proposed, so couples should continue to get early advice on CGT.  While the proposed change may give separating couples more time to agree the division of matrimonial assets before risking CGT, it will not remove the need to consider the CGT implications on divorce. Careful consideration and advice on CGT is required by separating couples, and the Personal & Family team at Brodies LLP would be pleased to assist.