How new tax thresholds impact divorce settlements in 2023

As we move towards the start of the 2023-24 tax year, the change in capital gains tax (CGT) rules is one of the most significant factors for divorce settlements that include transferring the ownership of property from one spouse to the other.

In recent years, there has been a rule that allows divorcing couples to transfer assets without paying CGT up until the end of the year in which they separate.

However, in 2020 the average time taken for separating couples to complete the divorce process stood at 53 weeks, which meant that in many cases, the ‘no gain no loss’ rule for CGT expired before the divorce was finalised.

In response to this, in May 2021 the Office of Tax Simplification recommended extending the window until the end of the tax year at least two years after the ‘separation event’.

What is a separation event?

The ‘separation event’ in this case does not relate to the finalising of the divorce, but to the moment when a couple start living separate lives.

It’s not always easy to determine when this is, but if one partner moves out of the family home, this can be one clear signal.

But because of the current rules, if the ‘separation event’ occurs on April 5th, the CGT exemption lasts for just one day before the next tax year begins.

This has historically led to some couples trying to claim they separated on a different date, in order to gain extra time to transfer assets without being taxed.

Extending the window to a maximum of three years should mean couples have more opportunity to complete the transfer of assets after separating.

How are the rules changing?

Legislation included in the Finance Bill 2022-23 makes several changes to the rules on CGT when transferring marital assets:

• Couples (including civil partners) have up to three years to transfer assets
• ‘No gain no loss’ will also apply to assets transferred via a divorce agreement
• A spouse with an interest in the former marital home will receive Private Residence Relief when it is sold

A spouse who transfers their interest to their ex-partner and is entitled to a percentage of the proceeds when the home is sold, will be allowed to pay tax on those proceeds as they would have done when they originally transferred their interest.

The new rules are due to come into effect on April 6th 2023, the start of the tax year, and will apply to disposals made on or after that date.

What should I know?

There are a few things to remember about these rules:

• The ‘separation event’ is when the relationship ends, not when a divorce is granted
• A lengthy divorce process could overrun the deadline for CGT-free asset transfers
• With the new rules, you have up to three years to complete any asset transfers

Divorce mediators work to avoid conflicts and keep separations moving forward, which is critical when negotiating time-sensitive agreements like the transfer of assets.

If you have substantial assets to agree on, tell your mediator – and this can be made a priority to finalise before your ‘no gain no loss’ deadline expires.