Going through a divorce can be one of the most stressful periods of a person’s life. Dividing up the matrimonial assets can be one of the most difficult aspects to deal with, and one aspect that has always seemed very unfair is the possibility of a Capital Gains Tax (CGT) liability arising as a result of transfers of property between two parties to a divorce.

As things stand, any transfers of property between spouses who are living together take place on a “no gain no loss” basis, meaning the asset passes at cost for CGT purposes, and any gain is deferred until the asset in question is sold. When a married couple separate, this favourable CGT treatment continues to apply throughout the tax year of separation. After that, the parties remain ‘connected’ for CGT purposes (meaning transfers are deemed to take place at market value) until the divorce is finalised. In reality, the process of agreeing a division of assets will take a significant length of time, meaning transfers will usually take place after the end of the tax year of separation, resulting in CGT liabilities (due to the deemed market value disposal rule) – talk about kicking somebody whilst they are down!

It is therefore very welcome news that the Government have announced that the rules will be changed for transfers on or after 6 April 2023. From that date, all transfers of assets between the two parties will take place on a “no gain no loss” basis until the earlier of:

  • The end of the third tax year following the tax year of separation
  • The date when the divorce is finalised

Furthermore, where transfers are made as part of a formal divorce agreement or court order, the “no gain no loss” treatment will continue to apply indefinitely.

These changes will come too late for some couples who have already transferred assets or who will be compelled to transfer assets before 6 April 2023, but going forward the changes will be extremely helpful for divorcing couples and an unwanted CGT liability will be one fewer thing to worry about.

If you have any questions regarding Capital Gains Tax, please speak to your usual Dodd & Co adviser.

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by Jonathan Ridley