Financial settlement in divorce – important capital gains tax changes

For anyone considering financial settlement in divorce proceedings, an important change to how capital gains tax is considered takes effect from 6 April 2023, affecting how capital gains tax is calculated on the separation of matrimonial assets. These changes affecting the dividing of assets in divorce should be considered, before taking any action.

This change in law amends the rules that apply to the transfers of matrimonial assets between spouses as part of a financial settlement in divorce as well as civil partners who are in the process of divorcing/separating, thus altering the financial settlement after divorce time limit with regards to capital gains and the family home.

What are the capital gains tax changes affecting financial settlement in divorce?

Currently, a no gain or no loss transfers of assets between divorcing couples can only be made in the tax year in which the divorce occurs. The new rules will provide up to three years in which a divorcing couple ceases to live together; and unlimited time, where it is subject to a formal divorce agreement.

The change from 6 April 2023 also introduces special rules that will apply to individuals who have maintained a financial interest in their former family home following separation which will apply when the home is subsequently sold.

These changes follow the Office of Tax Simplification’s second Capital Gains Tax report which considered how Capital Gains Tax rules apply in divorce. The OTS recommended that the Government should extend the ‘no gain no loss’ window on separation to the end of the tax year at least two years after a separation event. The government agreed that the ‘no gain no loss’ window on separation and divorce should be extended in 2021.

Further details on the capital gains tax changes

Introduced in the 22/23 Finance Bill, the legislation that comes into effect from April 2023 provides the following:

  • Spouses or civil partners separating will be given up to three years following the year in which they cease to live together to facilitate no gain or no loss transfers
  • The no gain or no loss treatment is to also apply to other assets separating spouses/civil partners transfer between each other, when it forms part of a formal divorce agreement.
  • When a spouse/civil partner retains an interest in the former matrimonial home, they will be given the option to claim Private Residence Relief (PRR) on its sale

The Government believes that these changes will make the process of distributing assets for those spouses who are separating or divorcing fairer.

These changes will particularly benefit those who are involved in more complex financial settlements on divorce, as it allows more time can be spent on the divorce considerations, without occurring a capital gains tax liability.

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