In April 2023, significant amendments were made to the capital gains tax (CGT) rules concerning divorce and dissolution of civil partnerships in the United Kingdom. These changes aim to simplify the process of dividing assets during and post-separation, ensuring fairness and clarity for all parties involved. Here we will delve into the details of these modifications and explore their implications for tax professionals and their clients.
The pre-April 2023 rules
Before we explore the recent changes, let's recap the previous rules surrounding CGT in divorce and dissolution cases. Ordinarily, assets can be passed between spouses and civil partners free of CGT. However, under the pre-April 2023 rules for divorcing couples, transfers between the parties were deemed to take place at market value for CGT purposes if the transfers took place after the end of the tax year of separation (which could be much earlier than the divorce itself).
In other words, if a couple separated on 1 May 2020, they would be able to make CGT-free transfers between themselves until the end of that tax year - therefore until 5 April 2021. However, had that couple instead separated on 1 April 2020, they would have had just five days to make any CGT-free transfers! This was clearly inequitable and led to considerable confusion - and significant ambiguity amongst clients, lawyers and tax advisors as to what the “date of separation” actually was…
Overview of the changes
The changes implemented in April 2023 represent a hugely welcomed simplification of the CGT treatment in divorce and dissolution cases. The key modifications include:
Potentially indefinite deadline
Under the new rules from 6 April 2023, transfers of assets between separating spouses or civil partners are now treated as "no gain/no loss" transfers for CGT purposes for an indefinite period, provided the transfers are made pursuant to a formal divorce agreement (including an Order made by consent). This means that the transfer is deemed to occur at the original cost of the asset, thereby deferring any CGT liability until a future disposal.
The ‘three-year’ rule
The changes now allow transfers made between the parties other than under a Court Order until the end of the tax year three years following separation. A couple who separated on 1 May 2023 will therefore now have until 5 April 2027 to benefit from the no gain/no loss transfer provisions (in effect, almost four years since the actual date of separation).
This three-year period, however, will end if the Court pronounces decree absolute or issues a final order. Any subsequent assets being transferred between the parties would therefore need to be included in the formal court-approved agreement to continue to benefit from tax-neutrality.
It is crucial to emphasise the importance of maintaining accurate records of all asset transfers, including the original cost and acquisition dates. This information will be vital for future CGT calculations when the assets are eventually disposed of.
Seeking expert advice
Given the multidisciplinary nature of divorce and dissolution cases, tax professionals should collaborate with family law solicitors, financial planners, and other relevant professionals to provide comprehensive advice and ensure a holistic approach to the parties’ financial well-being.
This is particularly relevant in international, high-value or otherwise complex cases, where specialist advice - often across jurisdictional borders - is paramount. Clients obtaining advice at the very earliest stage remains paramount, and the tax position can still be highly complex; though the relaxation on timings outlined above is certainly a positive step in the right direction.
How can we help?
We are regularly instructed by family lawyers in London and around the UK to advise on the tax implications of complex divorce cases, acting either for one party or as a ‘Single Joint Expert’ for both. We are well-versed in the rules for expert witnesses advising the Family Court, and we recognise that such advice is often required at short notice. We also have excellent relationships with family lawyers and tax advisors in other jurisdictions - including the US, Italy and France - on whom we can call if necessary.
Please contact James Heathcote to discuss your own specific circumstances - or those of your client - in confidence. If you would like to understand more about James's professional CV relating to divorce, he will be happy to share this.