Separating couples could be made aware that they may have underpaid tax in the past following changes made to Capital Gains Tax (CGT) regulations, says Azets.

These new measures have been welcomed and are expected to make the transfer of assets experienced by spouses or civil partners who are separating easier and enable a tax-efficient split.

What is Capital Gains Tax?

CGT is the tax on the gain arising which applies when certain assets are sold. If the asset has increased in value from when it was acquired, then a tax on this gain could be payable – although a number of reliefs and allowances are available. It is payable on assets such as property that is not the main home, shares, business assets and certain personal possessions valued at more than £6,000. CGT benefits that apply to separating couples, old or new, do not apply to unmarried couples or those not in civil partnerships.

The changes explained

The regulations, announced by the Government in the last Budget, and applying with effect from 6 April 2023, extend the time allowed for ‘no gain/no loss’ asset transfers to up to three years, or unlimited time if it is the family home that is transferred under an agreement or a court order.

Previously, couples had until the end of the tax year in which they permanently separated to benefit from the ‘no gain/no loss’ relief, often creating more stress at an already difficult time. As an example, if the couple separated in March, this would create a very small window of time to transfer assets without triggering a potential CGT charge in April.

It seems the previous rule that applied up until 5 April 2023 was not well known to many couples separating. It may have been assumed that the transfer of assets between themselves continued on a ‘no gain no loss’ basis up until the point the separation was finalised by divorce or dissolution, however, this was not the case.

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The tax implications of divorce are an important part of understanding the full outcome of a financial settlement with many lawyers recommending tax advice is sought in these situations.

The situation can become more complicated if there is a business is involved and where shares may form part of that settlement. Private business share valuations can take a long time to agree and could have previously extended beyond the period where a no gain no loss transfer was possible. 

It could also be relevant where properties are involved and formal valuations may be required, especially in cases where the financial settlement is dependent on a sale. The new rules include special provisions for circumstances where an individual retains a financial interest in their former family home after a separation and the home is then sold.

Publicity surrounding these CGT changes will hopefully make people aware that they may need to take action to avoid certain pitfalls to ensure that their financial settlement on separation takes into account the effect of any tax liability – not just capital gains tax – and the correct tax is paid.