Transferring assets after divorce: What are the capital gains tax rules and how are they changing?

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Lisa Pepper:  For couples who have already separated, I am 100 per cent advising them – if they can – to hit pause on transferring assets for the next few months

Lisa Pepper:  For couples who have already separated, I am 100 per cent advising them – if they can – to hit pause on transferring assets for the next few months

Divorcing couples prepared to delay transferring assets between them until next April could make significant tax savings, according to a legal expert.

They will be given more time and flexibility to consider how to divide up their assets under a pending relaxation of capital gains tax exemptions in divorce.

For partners no longer living together, the time limit for capital gains tax-free transfers will be extended, from the end of the tax year in which they separate to three years.

If they have a formal divorce agreement signed off by a court there will be no deadline, explains Osbornes Law family partner Lisa Pepper.

However, while this means some couples won’t face a CGT bill at all, after assets are divided up this tax might come back into play later, according to Evelyn Partners tax partner Chris Springett.

CGT could still be levied if an asset received by one of the partners is then sold – a transaction, as opposed to a transfer – unless they can take advantage of allowances or different exemptions, he explains.

>> How does CGT work? When are you liable, and what rates and tax-free allowances apply? Find out below

The law change on CGT is welcome news for divorcing couples, because although the specifics of each case need to be considered, delaying will be beneficial for most of them, says Pepper.

‘Divorce is traumatic enough without adding extra stress and expense, so for couples coming to me now, who have already separated, I am 100 per cent advising them – if they can – to hit pause on transferring assets for the next few months so they can take advantage of this tax break.’

Got a tax question? 

Heather Rogers, founder and owner of Aston Accountancy, is This is Money’s tax columnist.

She can answer your questions on any tax topic – tax codes, inheritance tax, income tax, capital gains tax, and much more.

You can write to Heather at experts@thisismoney.co.uk. Please put TAX QUESTION in the subject line.

Chancellor Jeremy Hunt has just announced plans to slash the allowance of £12,300 before CGT is levied to £6,000 next April and to £3,000 in April 2024.

But Pepper says these allowance changes don’t alter the advice on delaying if you can, given that the divorcing couples taking advantage of the new rules won’t need to pay CGT at all on asset transfers.

She says: ‘This doesn’t mean separating couples have to completely stop the process of divorcing.

‘They can carry on negotiating their financial separation and indeed have a financial remedy order from the court, as long as they agree that the sale or transfer of the property or other asset will happen on or after 6 April.

‘If the finalised remedy order is implemented before that date, then they will caught by the current CGT rules and will potentially need to pay tax on any profits.’

Pepper says it is possible to get divorced before finances are agreed and assets are divided up, but this is generally advised against.

She urges couples to draw up a legally binding financial settlement, so both parties are ‘crystal clear’ on who will be taking what.

Down the line: CGT could still be levied if an asset received by one of the partners is sold later

Down the line: CGT could still be levied if an asset received by one of the partners is sold later

How does CGT work?

Capital gains tax is payable on the profits from the sale of an asset – what you sell it for, less what you paid for it.

Depending on the asset there are reliefs available and each person has a capital gains tax allowance, currently £12,300 each year, to offset against their gains.

As explained above, the CGT tax-free allowance will be cut to £6,000 in April 2023 and then to £3,000 in April 2024, in a shake-up announced by the Government earlier this month.

HEATHER ROGERS ANSWERS YOUR TAX QUESTIONS

       

‘If an asset was transferred to you as a gift, then the value at transfer will be the valuation for acquisition,’ explains This is Money’s tax expert Heather Rogers.

‘When the asset is left to you through a will, then the probate value will be the value you are deemed to have acquired it for.’

Rogers, the founder and owner of Aston Accountancy, adds: ‘You can deduct costs of acquisition and disposal if relevant – the estate agent’s and solicitor’s fees on sale, for example. You can also deduct costs where you have spent money and have added value to the asset.’

She explains how to carry forward capital losses to offset them against future capital gains here.

Regarding CGT rates, if you’re a higher or additional rate taxpayer (40 per cent or 45 per cent respectively) the CGT rate is 28 per cent on gains from residential property and 20 per cent on gains from other chargeable assets.

For basic rate taxpayers (20 per cent), if your taxable gain plus your total taxable income fall within the basic income tax band of £12,571 to £50,270, the CGT rate is 18 per cent on residential property and 10 per cent on other gains.

If the amount is higher, the CGT rate is 28 per cent on residential property and 20 per cent on other gains.

The Government has more information on CGT rates here.

How does CGT work for divorcing couples now, and what changes are due next April?

At present, those who are in the process of separating and are no longer living together can incur CGT if they divide up assets after the end of the tax year in which they separate, says Pepper.

However, new legislation is scheduled in the Finance Bill 2022-23 which relaxes the rules and eases the time pressure placed on couples.

From April 2023, they will have up to three years to transfer assets, and in cases where there is a formal divorce agreement ordered by a court there will be no time limit at all, explains Pepper.

Meanwhile, she says spouses who move out of the family home but retain an interest to be received later – when their children turn 18, for example – are given the option to claim Private Residence Relief on that property when it is sold. That relief exempts them from capital gains tax.

Pepper goes on: ‘If a spouse transfers their interest in the property to their ex on the understanding that they receive a percentage from the proceeds when it is eventually sold, the same tax treatment will apply then as applied at the time of the transfer – they will not pay tax on the gain in property value whilst they wait to realise their interest.

Chris Springett: The changes mean a ‘no gain no loss window’ on separation and divorce is being extended to up to three years after the year of separation

Chris Springett: The changes mean a ‘no gain no loss window’ on separation and divorce is being extended to up to three years after the year of separation

However, she warns any transfer of assets should take place only once a legally binding financial settlement has been agreed.

‘CGT isn’t something most couples consider or are even aware of when they decide to divorce, but it can end up costing them a significant amount,’ says Pepper.

‘The time limits imposed to date have been unnecessarily strict and unfair, meaning most couples end up paying CGT on at least some of their assets.

‘Even those who move out at the start of the new tax year only have a maximum of 12 months, and others stay together longer than they want to, solely to wait for a new tax year to start, so they can avoid a hefty bill.

‘It’s been particularly harsh on couples who want an amicable separation and one of them agrees to move out of the family home to keep the peace, and then is penalised financially if that causes them to lose the CGT exemption on that property, if it is no longer their main home.’

Pepper adds: ‘Whilst you should always take advice from a tax adviser so that you are clear on the implications of any asset transfers in your specific circumstances, these changes mean that for many couples, pausing their divorce could result in significant savings.’

What do finance experts say?

‘The new tax rules mean that there is a big benefit to holding off signing on the dotted line until after 6 April next year, as if you get divorced before then you’ll fall under the old rules,’ says Laura Suter, head of personal finance at the investment platform AJ Bell.

‘However, for many people this isn’t a practical solution and they will have to weigh up whether they can actually wait months to get their divorce finalised.’

Suter says the change to this niche area in the tax rules will be a big relief for couples who are divorcing and have assets and investments they need to transfer between them, because they will be given three years from when they divorce to do this and can save on potentially large tax bills.

‘The current rules mean that you only have the remainder of the tax year in which you get divorced to make transfers of investments or assets without it being considered for CGT purposes.

Laura Suter: Clearly basing your divorce around the tax year system isn’t practical, so this fix will avoid a lot of hassle and stress

Laura Suter: Clearly basing your divorce around the tax year system isn’t practical, so this fix will avoid a lot of hassle and stress

‘It means that before now there has been a bizarre case where it’s more beneficial to get divorced in the new tax year in April, as it gives you more time to sort your finances.

‘Likewise if you were “unlucky” enough to get divorced in late March you’d face a dash to get your financial affairs in line before the April 5 deadline.

‘Clearly basing your divorce around the tax year system isn’t practical, so this fix will avoid a lot of hassle and stress.’

Chris Springett, tax partner at Evelyn Partners, says the changes mean a ‘no gain no loss window’ on separation and divorce is being extended to up to three years after the year of separation.

‘Separating spouses and civil partners will therefore have additional time before CGT applies to transfers,’ he says. 

‘Assets transferred later under a formal divorce agreement will also be at “no gain no loss”.

‘The Government also confirmed changes that will improve the CGT position of those who retain an interest in the former matrimonial home when it is occupied by their former partners.

‘Currently, couples have only until the end of the tax year in which they separate to transfer assets without incurring a CGT charge.

‘This has been particularly problematic for those who separate close to the end of the tax year, and creates artificial pressure to speed up the division of assets.’  

Danny Clifford, chair of the Chartered Institute of Taxation’s UK private client committee, says the rule change is a sensible reform.

‘The current rules state that when a couple cease to live together as a married couple (in circumstances likely to be permanent), they only have the rest of the tax year to transfer assets to each other without incurring an immediate CGT bill. 

‘A couple separating on 31 March have less than a week to do this before the tax year expires.

‘In practice those with professional advice are more likely to be able to navigate the rules and avoid the CGT charge while those without professional advisers frequently fall foul of it.’ 

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