Capital Gains Tax rules change for couple separations

Divorce or dissolution can be a painful process, but new rules relating to Capital Gains Tax (CGT) should ease some of the tax complications couples face when splitting assets.

Under UK tax rules, assets can be transferred between married couples and civil partners without triggering a CGT charge. But difficulties can arise once a relationship breaks down.

Under the old rules this exemption only applied to assets transferred within the tax year of separation — giving some couples just months to sort their finances tax efficiently.

What are the new Capital Gains Tax rules for separating couples?

The new rules, which came into force this April, give separating couples welcome breathing space, as they now have up to three years to transfer assets without incurring CGT. If this transfer is part of a formal separation agreement, then there is no time limit on this CGT exemption.

Steven Tebbutt, Director of Tax & HCA, comments, “The recent adjustments to CGT rules in the context of separations offer a unique set of opportunities for our private tax clients undergoing divorce or dissolution. These changes, effective since April 2023, presents individuals with an opportunity to think strategically about their financial affairs during a challenging period.

With the extended window of up to three years for CGT-exempt asset transfers, couples can now take a more deliberate and considered approach to the division of their assets with less fear of onerous tax consequences. The relaxation in the rules means that couples now have an opportunity to minimise tax without being the same level of pressure at what is already a difficult time”.

Beyond the relief of extended time frames, the ability for the departing spouse to allocate Private Residence Relief (PRR) between the former family home and other properties adds a layer of flexibility that can lead to substantial tax savings.

What are the Capital Gains Tax rules for separating couples who own a house together?

This relaxation of the CGT rules will also benefit couples who own a house together. Ordinarily the sale of a family home is not subject to CGT if it is your primary residence – under Private Residence Relief (PRR) rules.

However, if a couple splits and one partner moves out, before April this year they could have lost this PRR after nine months. This meant they could have faced a significant tax bill if the house was subsequently sold, and the gain was above the CGT threshold – currently £6,000.

Now, separating couples have at least three years to sell a property before this tax applies. In addition, the leaving spouse or partner can now elect how their PRR is split between a former family home and any other property they might have since acquired.

The changes should help many couples who now don’t have to sell the family home during their separation, two hugely stressful life events, in order to avoid a substantial tax bill.

Steven concludes, “Of course, comprehensive tax planning should still be sought to ensure CGT savings are maximised and to ensure that other taxes (such as Stamp Duty Land Tax) are carefully managed, but there is now greater scope to minimize tax liabilities when handling shared residences during separations.”

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