Spring Budget 2023 brought a whole host of changes to the treatment of Capital Gains Tax (“CGT”). While the Government reduced the CGT allowance from £12,300 to £6,000, with a further reduction in 2024, they were generous in their treatment of CGT on separation and divorce.
Previous CGT regime
The previous CGT regime, set out in section 58 of the Taxation of Chargeable Gains Act 1992 provided that no CGT would be payable upon separation only for the remainder of the tax year that separation took place.
This meant that any transfers which would potentially incur CGT would have to be made within the tax year of separation to ensure that CGT would not be paid. This unfortunately is not always possible.
In addition, the principle private residence exemption for CGT was lost 9 months after leaving the former family home.
This means that even marriages where there is only one property, the former family home, one party can be liable to capital gains tax on their share of the former family home if a transfer does not take place in the same tax year as separation.
New CGT regime
The Spring Finance bill 2023, announced in March’s budget made significant changes to how CGT is treated on divorce. Amendments have been made to Section 58 of the Taxation of Chargeable Gains Act 1992 to allow a new subsection 58(1C) which allows for no capital gains tax to be payable for disposals of assets made before the earlier of either: -
• The end of the third tax year in which the parties ceased to live together: or
• The date on which the parties divorce, their marriage or civil partnership is annulled, or they separate as part of a separation order.
Also, the Spring Finance Bill brought in other changes in relation to the principle private residence relief.
Amendments to Section 225 B of the Taxation of Chargeable Gains Act 1992 allows for a spouse who retains an interest in the former family home to be able to claim principle private residence relief when it is sold to a third party. For example, if the former family home remains in joint names with your spouse on the provision that the property is sold when the youngest child reaches the age of 18, when the property is sold you would be able to elect the principle private residence relief to prevent you from having to pay CGT on your share, even if you do not live at the property.
Also, a new provision under section 225BA of the Taxation of Chargeable Gains Act 1992 provides that if you transfer your interest in the former family home but are entitled to obtain a share of the net sale proceeds, then you would be able to apply the same tax treatment to the monies received as the tax provisions that applied when the original transfer took place. For example, if you transferred the former family home to your spouse and you retained a charge over the property reflecting your interest, then when you received the lump sum reflecting your interest, the monies would be subject to the same tax provisions as at the time the transfer took place.
What this means
In short – more time and potentially less tax.
CGT is a broad issue which impacts on smaller asset cases when considering separation and divorce. The new CGT rules can potentially save a spouse thousands of pounds in tax, which can be used for other purposes.
Whilst your family lawyer cannot give you tax advice, we can point out if these issues come up in matrimonial finances and guide you through the process.
Our experienced, specialist team of family lawyers are able to help answer any queries that you may have regarding matrimonial finances on divorce.