Capital gains rules relaxed for separations

Post by Mearns & Company in News

Divorce or dissolution can be a painful process, but new rules should ease some of the tax complications couples face when dividing assets, including the family home.

The changes relate to capital gains tax (CGT). 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.

Relaxed timelines

The new rules, which came into force this April, give separating couples welcome breathing space. Couples now have up to three years to transfer assets between each other without incurring CGT. If this transfer is part of a formal divorce/dissolution agreement or court order then there is no time limit on this CGT exemption, so couples involved in protracted and complex cases won’t face additional tax charges.

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 would have lost this PRR after nine months. This meant one partner could have faced a significant tax bill if the house was subsequently sold, and the gain was above the CGT threshold – currently £6,000.

The new rules give more flexibility to couples in this situation. The CGT change means separating couples have at least three years to sell a property before this tax applies. In addition, the leaving spouse or civil partner can now elect how their PRR is split between a former family home and any other property they might have since acquired.

Sometimes as part of a settlement one partner retains the right to a percentage of the proceeds from the future sale of a property, possibly once any children have reached adulthood. Under the new rules the leaving partner can apply the same tax treatment to these proceeds that applied when they transferred their original interest in the home to their ex-spouse or partner.

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.

The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.