Capital Gains Tax and Divorce

Married couples have access to a number of tax advantages. This includes passing assets between themselves during their lifetimes without tax charges, inheriting assets from their spouse free of tax and the potential to reduce income tax through the transfer of their personal allowance.  

What is Capital Gains Tax? 

Capital Gains Tax (CGT) is a tax charged on the transfer, or the sale of, a property. It is a tax based on the increase in value since the property was acquired.  

In the context of CGT, the principal advantage is that spouses can make transfers of assets between themselves during the course of the marriage without having to pay CGT. This applies to all assets, including second homes, business interests, shares and capital. This is known as the ‘no gain, no loss’ relief. 

The significance of this tax advantage on divorcing spouses is that upon divorce, spouses can benefit from the ‘no gain, no loss’ relief up until the end of the tax year in which they separate. As an example, this means that spouses separating in March will only have days or weeks to complete transfers, whereas those who separate in May will have 11 months to do so. 

If spouses miss this deadline, the transferor must pay CGT based on the gain in the value since the acquisition of the asset, or share of asset, being transferred. 

The tax implications of divorce can be complex and costly. You should carefully plan the division of your assets and seek specialist advice to minimise the tax burden of your separation. If you’re considering or going through a divorce, click below for a free initial consultation with one of our expert divorce solicitors. 

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New rules from 6 April 2023 

In March 2023, the government announced in the Spring Budget that from the start of the new Tax Year on 6 April 2023, the tax treatment on the transfer of assets between spouses and civil partners who have separated will become more flexible. 

Under the new rules, separating spouses now have more time to arrange their financial affairs. The changes applying to the disposals that occur on or after 6 April 2023 are: 

• Separating spouses now have up the 3 years from the end of the tax year in which they separate to transfer assets on a no gain, no loss basis; and 

• That if the assets are transferred as part of a formal divorce agreement, then the 3-year time limit does not apply, and instead there is an unlimited time limit to transfer the assets and benefit from the ‘no gain, no loss’ relief. 

CGT on the transfer or sale of the matrimonial home 

The sale or transfer of the matrimonial home often attracts a special CGT relief known as ‘principal private residence’ relief, or PPR relief. This enables spouses to transfer or sell their main home without paying CGT on any gain made. PPR relief is only available where the property in question is an individual’s main residence and is occupied by them, except in certain limited circumstances. 

Where either spouse has more than one residence, they can separately nominate which property should be considered their main residence for the purposes of PPR relief.  

If one spouse moves out of the matrimonial home and transfers their interest in the property to the other spouse under a court order, a special extension to PPR relief may apply. For this extension to be valid, the transferee must have continuously occupied the property as their residence since the transferor left. There is no maximum time limit for this relief, however the transferor will not be able to make a PPR claim on any other property during this period. Additionally, the relief will not apply if the property is being sold to a third party. 

If the transferring spouse has been away from the matrimonial home for more than 9 months, they may not qualify for PPR relief. 

CGT on overseas assets or if you are abroad 

You may have to pay CGT on assets held overseas, for example on a holiday home, if that asset is not listed as part of the financial settlement of your divorce.  

If this is the case, you must consider the impact of foreign currency movements on the disposal of the assets. Additionally, there may be local taxation issues to consider.  

If you are a non-resident in the UK, you must pay tax on gains from property or land you own in the UK. However, you may be exempt from paying CGT on other UK assets, such as shares in companies, unless you return to the UK within five years of leaving. 

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