Prepare for changes to CGT rules around divorce, firm says

People must prepare for an imminent change to capital gains tax rules that will make it easier for divorcing couples to divide their assets after separating without incurring a tax charge, Clarke Willmott has said. 

Paul Davies, who leads the private capital team at the law firm, said the two taxes most affected by divorce are inheritance tax (IHT) and capital gains tax (CGT), but changes to the latter will be effective from 6 April 2023.

The government has introduced a number of changes that will apply to disposals made after 5 April 2023: 

• Separating spouses will be given up to three years after the year they cease to live together in which to make no gain/no loss transfers
• No gain/no loss treatment will also apply to assets that separating spouses transfer between themselves as part of a formal divorce agreement
• A spouse who retains an interest in the former matrimonial home will be given an option to claim CGT residence relief when it is sold
• Individuals who have transferred their interest in the former matrimonial home to their ex-spouse and are entitled to receive a percentage of the proceeds when that home is eventually sold, will also be able to claim CGT residence relief on those proceeds

Davies said the effect of these changes will be to grant more time following separation to transfer assets without triggering a CGT charge – up to three years following the tax year of separation or at any time as part of a formal divorce agreement.

With IHT however, the general exemption for transfers between spouses will continue up until the date of decree absolute, and if the couple separates, but does not divorce, then the exemption will continue to apply. 

Davies said: “Transfers between spouses that are made after divorce will not be subject to IHT if made in accordance with a court order, or (usually) in accordance with a binding agreement made pre-divorce. 

“Otherwise, a transfer to a former spouse is likely to be treated the same way as a transfer to any other individual, ie as a ‘potentially exempt transfer’ that will be taken into account on death if the person making the transfer dies within the following seven years.”