Capital Gains Tax – The Changes

In the current tax year, there have been a number of changes to capital gains tax, including to the rules affecting those getting divorced.

Allowance

Firstly, the general changes. In the 2023/24 tax year, the individual annual capital gains tax allowance has reduced from £12,300 to £6,000. This will be reduced again on the 6th April 2024 to £3,000 per annum. Any gains made over the allowance are taxed at 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers, other than for residential property where the rates are 18% and 28% respectively.

This means that encashing investments or selling property, other than your principle primary residence (PPR), that have increased in value, could lead to a tax liability if the increase is greater than the annual CGT allowance.

CGT and Divorce

The old rules, up to 5th April 2023:

The no gain/no loss rule on transfers applied in the year of separation, transfers in future years may be taxable. However, this is an unrealistic timescale for separating couples to agree how assets are to be split and then make the actual transfers without incurring a possible charge to CGT. For example, a couple separating on 6 April 2022 would have a year to sort their affairs out, whilst a couple separating on 6 January 2023 would only have three months. As the average time in England and Wales between applying for, and securing, a divorce in 2020 was just over a year, the timescale is just unachievable. Where there are any disputes and the requirement for court, it can be far longer.

The transfer of the matrimonial home is a disposal for CGT purposes, and a gain may accrue, which would be the case if the period between moving out of the matrimonial home and the transfer was longer than the final nine month exemption period. The charge was mitigated, in appropriate cases, by an election under TCGA92/s225B, which allows the former matrimonial home to be treated as the main residence of the transferring spouse until the earlier of the date of transfer, or the date on which the property stops being the only or main residence of the spouse to whom the property is transferred. However, if the departing spouse acquires another property, they won’t obtain PRR on both properties.

The good news is that these rules have changed for the better. The new rules, applying to disposals on or after 6th April 2023:

•  The no gain/ loss rule on transfers has been extended to three years after the year a couple cease to live together;
• The no gain/ loss treatment will also apply with no time limit to assets that they transfer between themselves as part of a formal divorce agreement, which we strongly advise couples to have;
• A spouse or civil partner who retains an interest in the former matrimonial home is given an option to claim PRR when it is sold (As before, the leaving spouse/civil partner can only claim PRR on one property);
• An individual who has transferred their interest in the former matrimonial home to their ex-spouse or civil partner, and is entitled to receive a percentage of the proceeds when that home is eventually sold will be able to apply the same tax treatment to those proceeds that applied when they transferred their original interest in the home to their ex-spouse or civil partner;
• Depending on circumstances, the date of disposal could be
  • the date of the transfer
  • or if the transfer takes place following a court order recording the divorce settlement, the date of the court order
  • unless that precedes the date of the Final Order, in which case the date of the Final Order is the effective date.

However, it is worth mentioning that although the tax does not need to be paid at the point of transfer, it should still be taken into consideration when dividing the assets on divorce as it will need to be paid before it becomes “spendable” by the owner.