Tax changes for divorcing couples coming in 2023

For separating couples, tax is likely to be the last thing on either party’s mind. Even so, consideration should be given to any potential tax implications at the outset of the relationship breakdown to minimise any financial impact. Different tax rules apply to married couples, who benefit from several valuable tax exemptions. Separation or divorce has an impact on these exemptions, particularly in  relation to their liability for Capital Gains Tax (CGT) charges on transfers to one another.

The current position

Presently, married couples and civil partners  have until the end of the tax year in which they separate i.e., between 6 April one year and 5 April the next, to transfer chargeable assets between themselves without generating CGT. This is  because transfers between spouses or civil partners are exempt from CGT on a ‘no gain no loss’ basis.

Separating couples should therefore be aware of the ‘no gain no loss window’ for the transfer of chargeable assets to one another. Once the window has passed (i.e., when a new tax year begins), any transfers of chargeable assets between a separated couple will attract CGT at the market rate.

This state of affairs has meant that, rather impractically, it has made more sense for couples to separate at the start of a new tax year to allow more time to deal with the financial arrangements.

Under the current rules, separating couples also risk losing the full benefit of Private Residence Relief if one spouse has left the matrimonial home and not lived there for more than nine months when the property is sold or transferred. Private Residence Relief is a valuable tax relief from CGT upon an individual’s disposal of their only or main residence.

The pitfalls faced by separating couples under the current rules can result in serious financial consequences, which is why tax and legal professionals have lobbied for change for some time.

The proposed changes

Practitioners and clients alike will therefore welcome the government’s draft legislation published on 20 July 2022, which proposes to relax the rules on CGT upon separation or divorce. These proposed changes are set to take effect on or after 6 April 2023, although it is not yet clear whether these changes will be applied retrospectively. 

The changes include:

• Extending the ‘no gain no loss window’ to three years post-separation or for any reasonable period where the transfer of assets is part of a formal divorce agreement

• A spouse who retains an interest in the matrimonial home, but is no longer present, will be able to claim Private Residence Relief provided that the period of absence is a result of the divorce

• An individual who transfers their interest in the former matrimonial home to their ex, and is entitled to a percentage of the proceeds of sale, will get the same tax treatment when it is sold as when they transferred the interest

The changes will not impact any assets that are sold as part of proceedings and the CGT position upon sale will remain the same, with CGT payable within 60 days of sale.

It should be noted that these changes will only apply to couples separating following the breakdown of a marriage or civil partnership, as the ‘no gain no loss’ provisions do not apply to cohabitants.

Professional bodies have now been invited to comment on the draft legislation and whether it is fit for purpose. However no further changes to the legislation are anticipated.  

Once in force, the new rules should afford separating couples the time they need to focus on their financial arrangements without falling into a ‘CGT trap’, thus enabling them to retain funds that could be put to better use rather than being spent on tax charges.

Get in touch

For further information and guidance relating to the forthcoming changes, please get in touch with enquiries@attwaters.co.uk or call 0330 221 8855 and we’ll be delighted to assist you.