It is often only when you get into sorting out the financial matters between a couple that they realise that capital gains tax is a ‘thing’ and it could cause problems and cost. Happily, the restrictive and often torturous rules are changing as from 6 April 2023.
The changes are that separating spouses or civil partners be given:
- up to 3 years, after the year they cease to live together, to make no gain or no loss transfers of assets
- unlimited time when the assets are the subject of a formal divorce agreement
Why is this important? Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.
It’s the gain you make that’s taxed, not the amount of money you receive. For example, if you bought a painting for £5,000 and sold it later for £25,000, you’ve made a gain of £20,000 (£25,000 minus £5,000) and you pay tax on the £20,000 profit.
What is a disposal? Disposing of an asset includes:
- selling it
- giving it away as a gift, or transferring it to someone else
- swapping it for something else
- getting compensation for it – like an insurance payout if it’s been lost or destroyed
The reason you don’t pay tax on any gain when you sell your house is because there is a special exemption for your ‘principal private residence’.
Why has this been an issue for couples who are divorcing? Generally, when sorting out the financial assets for the long term, there are assets that are transferred from one spouse to another. If one spouse has moved out of the family home, then when does it stop becoming their ‘principal private residence’? There were rules about that and they were not very generous at all. Now, the rules are expanding that time limit and also expanding the exemption to the situation where a person has retained an interest in the family home – handy for all those situations where one party has to wait for their share of the family home, as is often the case if the children need housing and there is not enough to go around.
The reference to divorce ‘agreement’ also includes financial order. This reinforces that it is best to get an order in place for financial matters.
This is a basic summary of the capital gains tax changes but I would always recommend that you check your situation with an accountant.