Capital Gains Tax on Separation and Divorce

Spouses and civil partners enjoy certain tax breaks, including the ability to transfer assets between them at a value that gives rise to neither a gain nor a loss. Prior to 6 April 2023, a couple are only able to benefit from no gain/no loss transfers until the end of the tax year in which they separate. However, from 6 April 2023, the rules are relaxed in certain situations.

New Three-Year Rule

The window during which separating and divorcing couples are able to transfer assets between them at a value that gives rise to neither a gain nor a loss is extended. From 6 April 2023, separating and divorcing couples will have up to three years from the tax year in which they cease to live together to make no gain/no loss transfers. The no gain/no loss rule will continue to apply until the earlier of:

• the end of the third tax year following that in which the couple cease to live together; or
• the day on which the court grants an order or decree for their divorce, the annulment of their marriage, the dissolution or annulment of their civil partnership, their judicial separation or a separation in accordance with a separation order.

It should be noted that while making a no gain/no loss transfer prevents a chargeable gain arising on the transferor spouse/civil partner, the transferee assumes the transferor’s base cost. The gain at the date of disposal is effectively transferred to the transferee spouse/civil partner and will crystallise when they dispose of the asset. This may not be what they want.

Assets Forming Part of a Formal Divorce Agreement

From 6 April 2023, assets that form part of a formal divorce agreement can be transferred between the former spouses/civil partners on a no gain/no loss basis without time limit.

Matrimonial Home and Private Residence Relief

The rules on the availability of private residence relief where a person disposes of a retained interest in their former main home in which their former spouse or civil partner continues to live have been amended. From 6 April 2023, where one partner transfers their share of the former matrimonial home to their former spouse/civil partner but under an agreement is entitled to receive a share of the profit made on the eventual disposal of the property, they will be entitled to private residence relief in the same proportion that qualified for relief on the original disposal to their former partner. Where the original disposal was made on a no gain/no loss basis, private residence relief is available for the proportion of the gain that qualified for the no gain/no loss treatment.

Partner Note: Finance (No. 2) Bill cl. 41.