Capital gains tax and divorce: here’s all you need to know when sorting out your assets in separation

Matthew Miles, of Silk Family Law. Picture – supplied.

Did you know you could be liable for Capital Gains Tax when you divorce? Matthew Miles, of Silk Family Law, explains the liabilities and how a recent change in the law gives couples more time to agree financial settlements without incurring these charges.

For divorcing couples, the transfer of the matrimonial home and other properties between them may trigger a Capital Gains Tax (CGT) liability. This applies where there has been a gain in value since the asset was acquired. The tax position can be particularly complicated where there are multiple properties or overseas assets.

The previous rules allowed spouses to transfer assets between them on a ‘no gain no loss’ basis, but only during the tax year of their separation. Any gains or losses from the transfer would then be deferred until the asset is later disposed of by the receiving party. Transfers outside of the tax year of separation incurred CGT in the usual way, as if the transaction were taking place between third parties at market rate.

The rules were widely criticised, as separating spouses were given very little time to resolve the financial issues between them on a no gain no loss basis. Spouses separating in March could find themselves with only a few weeks to arrange their affairs without incurring a potential CGT liability, which was nearly impossible to achieve.

Did you know divorce could leave you liable for capital gains tax? But do you know what you need to do to avoid it? Picture – Adobe.

Three year grace period

The government has recently introduced changes to the legislation via the Finance (no 2 Bill) 2023 to improve the CGT treatment for divorcing couples effective from 6 April 2023. The new rules provide separating spouses with up to three years after the year they cease to live together to benefit from the no gain no loss tax treatment, and for an unlimited period where the transfer occurs as part of a ‘formal divorce agreement’.

Those spouses who maintain a financial interest in their former family home following separation will also benefit from the changes, as they will be given an option to claim private residence relief (‘PRR’) when it is eventually sold. Anyone who has transferred their interest in the family home to their ex-spouse and is entitled to receive a percentage of the future proceeds when it is sold can also apply the same tax treatment to the proceeds, as that which applied when the transfer to their ex-spouse took place.

These welcome changes will come as a relief to many couples engaged in divorce proceedings as it allows more time to negotiate their finances and avoid potential CGT consequences. Taking early legal advice can assist with reaching a financial settlement efficiently which leaves both parties better off from a tax perspective.

Family matters

For further advice on this or any other family law matter contact the team at Silk Family Law.