Proposed changes to capital gains tax for separating couples

⚠️ Please note, the legislation referred to in this article is still only in draft. At this stage there is no certainty that the new rules will come in as planned from April 2023. The rules themselves could change before they are introduced, or they could be scrapped entirely. If you may be affected by the new rules, then we recommend that you seek professional advice.

⚠️ Throughout this article we generally refer to ‘married couples’ and ‘spouses’, but the points we discuss apply equally to civil partners. Please note that there is no general relief from capital gains tax when assets are transferred between couples who are not married or in a civil partnership.  

Usually, married couples can transfer assets between them without incurring a capital gains tax (‘CGT’) charge on the transfer. This CGT treatment is often referred to as ‘no gain no loss’ treatment.

‘No gain no loss’ means that the transfer happens such that for CGT purposes there is deemed to be neither a gain nor a loss – regardless of the amount paid (if anything). You can read more about ‘no gain no loss’ transfers in our guidance.

What does it mean for a married couple to separate?

When a married couple separates – and by this we essentially mean the couple decides to permanently split up – there can be CGT consequences if assets are transferred between them after they separate.

We explain what it means for married couples to separate in our guidance.

Understanding the CGT position following separation is important. This is because couples often have assets (whether held jointly or by one person) that they wish to transfer between them when they go their separate ways.

What are the current rules when married couples separate?

Currently, separating spouses can continue to transfer assets between one another at ‘no gain no loss’ until the end of the tax year of separation. Therefore, if a married couple separates close to the end of the tax year (5 April), this can leave very little time to agree how they wish to divide up their assets and make any transfers and get ‘no gain no loss’ treatment. If the couple is going through a formal divorce process, then it may be virtually impossible to transfer assets within such a short timeframe.

At present, any transfer that takes place after the tax year of separation is treated as a normal disposal for CGT. This means the disposal is taxed based on the market value of the asset at the date of the transfer – even if no money or other proceeds are received in return. This means CGT may be due.

Example

Charlie and Alex are married but separate permanently on 1 February 2022. They own a rental property jointly and Charlie owns the marital home in his own name.

They decide in March 2022 that Charlie will transfer his half share in the rental property to Alex. The transfer happens before 5 April 2022 (the end of the tax year of separation) and, as a result, Charlie has ‘no gain no loss’ treatment applied on the share of the property that he has given to Alex.

If Charlie had not been able to transfer the half share before 5 April 2022, but were to do so now, in October 2022, then he will potentially face a CGT charge. This would be calculated based on the current market value of Charlie’s 50% share of the property, less his 50% share of the purchase cost and other associated acquisition costs (such as legal fees and stamp duty land tax). Charlie would also be required to report and pay any CGT liability within 60 days of the transfer to Alex.

You can read more about the reporting rules on the disposals of residential property on our page Capital gains tax reporting and record keeping.

You can read more about the current rules for separating married couples on our page Capital gains tax on separation.

What new rules are being proposed by the government?

Following recommendations made by various bodies, including LITRG, the government has proposed the following changes to the CGT rules for separating spouses/civil partners:

• Separating married couples will continue to have ‘no gain no loss’ CGT treatment applied on transfers of assets to each other for up to three years from the end of the tax year of separation.

• However, if the couple divorces (or otherwise they become legally separated by court order) before the end of the three-year period, ‘no gain no loss’ treatment will end at the date the divorce is finalised, unless the transfer of assets takes place as part of a formal divorce (or court separation) agreement – see next bullet.

• Where assets are transferred as part of a formal divorce (or court separation) agreement, there is no time limit applied to ‘no gain no loss’ treatment of asset transfers.

• The draft legislation also includes a change to how capital gains are calculated on the sale of the former marital home, where one party moves out following separation and there is an agreement for that person to receive a percentage of the proceeds from the sale. This change can allow that party to have any private residence relief on their share of the gain unaffected by the fact they did not live in the property between their moving out and the property being sold.

The new rules are planned to come into effect for disposals and transfers which occur on or after 6 April 2023. It will be the date of the disposal which determines whether the new rules apply, not the date of separation. See the examples below for more information.

You can read more about the proposed changes in the government’s policy paper.

What could these proposed new rules mean for me?

Firstly, it is important to understand that this legislation is still only in draft. At this stage there is no certainty that the new rules will come in as planned from April 2023. The rules themselves could change before they are introduced, or they could be scrapped entirely.

We therefore provide the following as an overview of the potential impact of these rules, particularly for couples who may have already separated and are yet to make transfers of assets.

Typical scenarios

A married couple separated permanently during the 2021/22 tax year and have now agreed how their assets will be split, which will mean they need to make certain transfers.

This scenario continues that of Charlie and Alex in the earlier example, who separated permanently in February 2022.

If Charlie were to wait and make the transfer on or after 6 April 2023, then, assuming the draft legislation does come in to force as planned, the transfer should have ‘no gain no loss’ treatment applied to the gain.

Alex will receive the half share of the property at Charlie’s original ‘base cost’ for CGT and therefore might suffer a higher charge to CGT if the property is sold at a later date.

The couple will obviously need to weigh up factors other than CGT. For example, Alex may need the rental income from Charlie’s half share now in order to meet living costs following the separation. In which case, delaying the transfer may not be in Alex’s best interests.

The above general scenario would also be the case for married couples who separated in 2019/20 or 2020/21. Separations occurring in these years will also fall within the proposed rules from 6 April 2023 (as these years will be within the three-year time frame). Separations from even earlier tax years may also have ‘no gain no loss’ treatment applied if transfers are made on or after 6 April 2023 as part of a formal divorce (or court separation) agreement.

A married couple separated permanently at the beginning of this tax year (in 2022/23) and are unable to agree how to divide their assets. Both parties are instructing solicitors and any transfers are unlikely to be agreed quickly.

This couple may feel under pressure to agree the division of assets quickly if they know they have until the end of the current tax year to transfer assets on a ’no gain no loss’ basis.

However, the proposed new rules would provide greater flexibility in terms of timings. They could have up to the end of 2025/26 to make transfers at ‘no gain no loss’, or an unlimited amount of time if the transfer of the assets takes place as part of a formal divorce (or court separation) agreement.

Again, the above will only be the case if the proposed rules come in as planned on 6 April 2023. If the new rules do not come in, they might be better off trying to ensure that transfers are made before 6 April 2023, as they would still qualify for ‘no gain no loss’ treatment under the current rules up until then.

Anyone who may be affected by the new rules should seek professional advice.

When will we know for sure if the new rules will apply?

The proposed new rules are currently published as ‘draft legislation’ which has not yet started the formal process of being introduced to parliament and being approved. There is a lengthy process of reviewing and approving the new legislation. We will only have complete certainty that the new rules will come into effect as proposed when the draft legislation reaches the end of this process and receives ‘Royal Assent’.

This may not happen until early to mid-2023, given a recent announcement that the next Budget is likely to be in spring 2023.

Meanwhile, if you are recently separated or in the process of separating you may wish to seek advice in relation to the transfer of assets in light of the proposed changes.