What are the rules for capital gains tax on divorce?

Capital Gains Tax (CGT) rules have changed in order to make the process for divorcing couples fairer, simpler, and less pressing. Transfers of assets or property between spouses when they are living together are not subject to CGT, but when couples divorce, things become more complicated. But what is CGT? How will it affect you, and is it something you will be required to pay? This article explains everything.

If you are concerned about CGT as part of your divorce and you require legal advice to understand your options, contact specialist family law solicitor Naheed Taj. Naheed is a highly acclaimed family solicitor with a successful track record in dealing with complex and challenging family law, divorce, and child cases.

What is CGT?

CGT is a tax on the gain, or profit, made by someone when an asset is sold. If the asset in question has increased in value from when it was first acquired, then a tax is payable on any gain in that value. CGT will be payable on things such as additional properties not considered the main home, shares, business assets, and most personal possessions with a value over £6,000.

Individuals in the basic income tax band pay 10% on their gains and 18% on gains from a residential property. Higher and additional rate taxpayers pay 20% on gains and 28% on residential property.

Many divorcing couples do not adequately consider tax implications from CGT and do not realise the importance of timing asset transfers between them. Some can find they receive an unwelcome and unnecessary CGT bill at an already challenging time.

What are the CGT rules?

The rules mean that divorcing couples will:

• No longer be restricted by a time limit for transferring assets between themselves, provided the transfer complies with the terms of a court order, including one made by consent (agreement), within financial proceedings as part of the divorce/dissolution process.
• Be given 3 years from the end of the tax year when the separation took place where they can make no gain/no loss transfers. In no gain/no loss transactions, the proceeds are deemed to be such that there is neither a gain nor a loss, regardless of the amount paid or received in return. It is not possible to opt out to make use of the annual exempt amount, capital losses, or lower tax rates that may be paid by the disposing spouse/civil partner.
• Claim principle private residence relief when the former family home is sold, providing they can meet the required conditions.

There are two significant dates that divorcing couples need to consider: the date of separation and the date of disposal of the asset.

Date of Separation

Couples will need to confirm the actual date of separation, being the time they began to live separate and apart from their ex. This doesn’t necessarily mean living in separate houses because it can exist even where parties jointly occupy the family property, by demonstrating no common life is shared. This includes taking meals at different times/separately, dealing with the household chores separately, and having independent lives, etc.

Date of disposal of the asset

The date of disposal of the asset is the date on which it is transferred from one party to another, or joint parties to one party.

These rules relieve pressure significantly because it allows both parties sufficient time to consider matters and seek legal and financial assistance. Neither party is penalised because they have to meet an immediate CGT liability on a transfer if there is a delay dividing financial assets.

What are the conditions for claiming principle private residence relief?

If the following conditions are met, the leaving spouse/civil partner will be able to get private residence relief from CGT:

• The property has been the leaving spouse/civil partner’s only or main residence throughout the period of ownership
• The leaving spouse/civil partner has not been absent other than for an allowed period of absence or because they have been living in job-related accommodation, during their period of ownership
• The garden/grounds, including the buildings on them, are not greater than the permitted area. The permitted area must not exceed half a hectare, which is a little over one acre.
• No part of the home has been used exclusively for business purposes during the period of ownership (including working from home using a room that is not only used for business purposes)

If you do not meet all the conditions, in certain circumstances, you may still be able to get partial relief. Although there is a complete bar on private residence relief, even if you meet all the above conditions, if:

• You dispose of all or part of your garden after disposing of your home
• You acquire a home and/or spend money on it in order to realise a gain when disposed of

For example, you purchased a property to sell it quickly for a profit or you were a tenant who bought out the freehold in order to increase your profit on a sale.

Examples of application of CGT rules

1. Lewis and Kate separated on 1^st August 2023. They run a business together and although they have taken financial and legal advice on division of the company; it has taken some time to deal with and they don’t reach an agreement until 1^st August 2025, some two years later. They decide not to encompass their agreement in a court order. The no gain/no loss approach to CGT will apply to the transfer of shares in the business.
2. The same scenario as above, but agreement is not reached until 1^st January 2027. Here, Lewis and Kate would need to get a court order, or they would incur a CGT charge on transferring shares in the business.

The rules are expected to make the process fairer and reduce pressure on separating spouses/civil partners who are divorcing and in the process of sharing assets between them. It is likely to be particularly advantageous for those involved in more complex proceedings that can extend beyond one tax year. The legislation will also allow parties to lessen their CGT liability because of the no gain/no loss window.

If your relationship has broken down and you are separating, it is sensible to seek advice from a specialist lawyer who can guide and support you throughout the process. If you need advice on CGT, then take a look at our extensive directory and get in touch with one of the family law experts.