Are the rules for capital gains tax for divorcing couples changing?
The short answer to that question is yes, they are and rather amazingly (considering all taxes seem to only head in one direction which is upwards) they are changing for the better. The government are bringing in new rules for Capital Gains Tax (CGT) from April 2023.
What is CGT?
Many divorcing couples are completely unaware that they may have to pay tax when they get divorced. Capital Gains Tax is a tax you must pay on any profit that you make on something that you sell that has increased in value. It is the increase in value that you are taxed on. For divorcing couples this will usually be property or stocks and shares.
Does CGT apply in every case?
There are some important exemptions that divorcing couples can take advantage of. All taxpayers get a CGT tax free allowance. However, the most important exemption for divorcing couples is the “private residence exemption”. This exemption applies to the family home if you lived in it, and it was your only home before it was sold at a profit.
However, you could still end up paying tax on any other property, or for example on artwork or stocks and shares that have gone up in value if you sell or transfer such property or other assets and investments outside the tax year of separation.
What is the tax year of separation?
Our tax year in the UK runs from the 6 April and ends on the 5 April the following year.
What happens if I sell or transfer my assets outside the tax year of separation?
You may have to pay CGT. This rule currently applies unfairly as the time you have in which to transfer your assets to your spouse or civil partner depends completely on when you separate. If you separate at the beginning of our tax year (shortly after 6 April) you will have the whole year in which to transfer any assets to your spouse or civil partner (until the 5 April, the following year). If, however you separate on the 31 March our current tax system gives you just days (until the 5 April) to deal with any transfer of your assets to your spouse or civil partner.
Divorce and separation are stressful enough without having to factor in the most tax efficient time to go your separate ways. It is this inherent unfairness in the current tax rules that the government is addressing at the beginning of the new tax year in 2023.
What are the new rules?
Under the new rules divorcing couples (or those seeking a dissolution of a civil partnership) will have up to 3 years in which to transfer properties to each other without worrying about any tax liability. Also, if couples enter into a formal divorce agreement or court order, they will not have any time limit at all to worry about.
A word of warning…
There may be tax to pay if an asset received by one of the couple is sold at a later date unless that person can take advantage of allowances or different exemptions. Tax is a very taxing and complex business! You must always seek advice from your accountant before reaching any final financial settlement following a divorce or dissolution of a partnership.
At Branch Austin McCormick we partner with accountants who can advise and assist on the taxation aspects of complex property transactions and the sale or transfer of other assets and investments in divorce proceedings or proceedings for the dissolution of a civil partnership.
If you are thinking of a divorce or separation, speak to Saika who heads our Family Law department. She offers a complimentary, no obligation consultation.
Saika Alam is a well-respected Family and Divorce lawyer based in Mayfair, London. Known for her personal and practical approach she has an extensive caseload that covers wealth protection, financial disputes, the children, parental orders, and cases with an international dimension.