Tax considerations for separation and divorce

Capital Gains Tax (CGT)

If you’re married or in a civil partnership, any assets transferred or gifted between you and your spouse or civil partner are at a “no gain no loss” basis, meaning that no taxable gains arise on the transfer of assets. Currently, this rule only applies to couples living together at some point during the tax year. From the tax year following separation, you’re both considered connected persons for CGT purposes until you are legally divorced. This means that any transfers of assets between you are deemed to take place at market value, even if no cash has exchanged hands. The result is that the person making the transfer could be left with a CGT liability. 

However, the government has announced that for transfers made from 6 April 2023, separating spouses and civil partners will be given up to three tax years after the year they separate in which to make “no gain no loss” transfers. This gives separating couples much more time to plan.

The proposals go further in relation to transfers made under a court order, as the plan is to make the extension for those transfers indefinite. There are suggestions this could apply to any other kinds of agreements too, and we await final proposals for clarification. We’ll update this article when confirmed.

The family home

Typically, the biggest source of contention between couples during the divorce process is the family home. After a separation, it’s not unusual for one spouse to move out to live elsewhere if staying in the family home becomes unfeasible.

Selling the property

Under general principles, the gain arising on the sale of a residential property, which has been your main residence throughout ownership, is exempt from CGT under Private Residence Relief (PRR). However, married couples and civil partners can only have one main residence between them. Currently, if the family home is to be sold and the proceeds divided between you both as part of the divorce settlement, the departing spouse will face part of their gain being taxable after nine months of them moving out, assuming they haven’t elected for another property to be treated as their main residence in this nine-month period. 

However, the government’s proposed changes from 6 April 2023 allow for the departing spouse to apply the same proportion of PRR on the eventual sale of the property as if they hadn’t moved out.

The residing spouse continues to qualify for 100% PRR on their share of the gain under new and old rules.

Transferring the property to the occupying spouse

In many circumstances, it’s not practical to sell the family home. Instead, the departing spouse transfers their (sole or joint) ownership of the family home to the spouse still living in the property as part of the divorce settlement. We assume that in the event of such a transfer, the new time extension of no gain no loss transfers referred to earlier will also apply here from 6 April 2023.

The new measures also cover situations where the departing spouse transfers their share of the property to the other party on the basis that the transferor will get a share of any profit made on a subsequent sale. The proposals from 6 April 2023  allow the transferor’s share of profit to be exempt from tax to the same extent that any gain on the original transfer was exempt (or would have been but for the no gain no loss treatment applying to it).

A remaining (very important) point that often gets overlooked is that if the transfer of the family home takes place under a Court order, the departing spouse will be able to claim that the home should be treated as if it continued to be their main residence, from the date they moved out to the date of transfer (however long this takes).