Lara Barton and Polly Atkins discuss CGT reforms in Christie’s Heritage and Taxation Bulletin

  • June 05, 2023
  • By Lara Barton, Partner and Polly Atkins, Associate

Lara and Polly’s article was published in Christie’s Heritage and Taxation Bulletin for Professional Advisors, 5 June 2023, and can be found here.

Tax no longer so taxing for divorcing couples

Long-awaited reforms easing the capital gains tax (CGT) burden on asset transfers between separating spouses and civil partners were confirmed in the 2023 Spring Budget. The changes follow years of work by practitioners to highlight the difficulties created by the application of the CGT rules to divorcing couples.

The reforms involve the widening of two key tax reliefs: the ability of spouses to make transfers between themselves without attracting CGT, and the exemption of primary residences from CGT. We consider each in turn.

Transfers between spouses

Financial settlements on divorce often involve spouses transferring jointly owned assets into the sole name of one party, or transferring assets from one to the other. As many readers will know, spouses can transfer chargeable assets between them without a CGT charge arising. The person receiving the asset is treated as acquiring it at the value at which their spouse acquired it such that no gain, and therefore no tax, arises at that time. Transfers between spouses are therefore described as taking place on a ‘no gain no loss’ basis.

But, as the saying goes, all good things must come to an end, and tax reliefs are no exception to that rule… or at least they didn’t use to be: ‘no gain no loss’ transfers between spouses ceased to be available after the end of the tax year in which they separated. This rendered the relief unavailable to many divorcing couples, creating significant tax bills at what, for many, was already a time of financial pressure.

The rules resulted in the peculiarity that a couple separating on 4 April would have one day to transfer their assets without triggering a tax charge, whilst a couple separating two days later would have a full year to do so. A couple would be treated as separated if they were “separated in such circumstances that the separation is likely to be permanent”; a vague concept open to interpretation.

Following the tax year of separation, the spouse making the transfer would be assessed as doing so at market value, and subject to CGT in the usual way. This would apply, for example, when a holiday home or investment property, shareholding or piece of art was transferred from joint names into one spouse’s sole name.

Unsurprisingly, most separating couples did not anticipate that dividing up their assets on divorce would generate a tax liability if not carried out within the tax year of separation. Even for those taking early legal advice, it was often not practicable to agree and implement a settlement within the tax year of separation, not least due to the lengthy delays in the family court.

This often resulted in cashflow difficulties: the transfer of assets between spouses created a tax liability but no assets had been realised to fund the tax. In particular, since April 2020, CGT has had to be paid on transfers of residential property within 30 days of the transfer. In some cases, the tax position meant parties had to sell assets they would otherwise have retained.

The new legislation goes a long way towards alleviating this problem. Under the new rules, any transfers between separating spouses will be at ‘no gain no loss’, with no immediate CGT payable, if they take place in accordance with an agreement between the parties in connection with their divorce or separation, or under a court order determining the financial arrangements to be made on divorce. There is no time limit on this, so even spouses who do not determine and implement their financial settlement for many years after their separation will be able to benefit.

Those who transfer assets between them other than as part of an agreement will need to be more careful. In such circumstances the ‘no gain no loss’ rule will apply for three years from the end of the tax year of separation. Say, for example, five years after Gina and Ali separate, they have not reached an overall financial agreement, but Gina gives a jointly-owned sculpture that she never liked to Ali. The transfer may attract CGT if it does not take place within the context of an agreement or court order.

The new rules will apply to disposals occurring on or after 6 April 2023 (although note that determining the date when an asset is “disposed of” for CGT purposes can be complex in the context of divorce). This will undoubtedly ease the burden on separating couples from a cashflow perspective, and remove pressure to rush into decisions about how to share assets before the end of the tax year of separation.

Of course, the CGT charge does not disappear, rather the gain is held over until a subsequent disposal of the asset. At that point, the spouse who then owns the asset will be responsible for paying any CGT on the gain arising over the entire period of both spouses’ ownership. The latent gain at the time of the transfer between the spouses therefore cannot be ignored; it must be factored into the value attributed to the asset when the parties are negotiating a financial settlement. There is also a practical aspect: the party receiving the asset should ensure they have all the necessary documentation to enable them to calculate the gain and complete the return at some future point. This may include evidence of the price paid, acquisition costs and improvement works.

Principal private residence (PPR) relief

As many readers will know, an individual is not subject to CGT on their only or main residence, provided certain conditions are met. However, under the old rules, separating spouses could lose part of their entitlement to this relief. This generally happened in one of two ways.

The first was where one spouse moved out of the family home on separation and the property was sold more than nine months later. This timeline is not unusual, as the process of deciding whether the home should be sold, and then completing a sale, can take some time. Under the old rules, the spouse who moved out would be subject to CGT in respect of the period from nine months after they moved out until the property was sold.

Under the new rules, the spouse who moves out can claim PPR for the entire period after they vacated the property, so long as the sale takes place within the context of an agreement or order made on divorce, their spouse has remained living in the property as their main home, and they are not claiming the relief in respect of any other property. This change is a fair reflection of the reality facing divorcing couples.

The second scenario in which entitlement to the relief could be lost is more complex. Say Samiya and Marc agree that the family home will be transferred to Samiya for her and the children to live in until the children finish school, following which it will be sold and Samiya will pay Marc a share of the sale proceeds. Such arrangements (known as “mesher orders” or “deferred sales”) have the advantage of enabling the children to remain living in their home, but until now have had adverse tax consequences – Marc would not be able to claim PPR relief in respect of the deferral period, meaning he could face a significant tax bill when the property was sold, even though it had been Samiya and the children’s main home.

Under the new rules, when the home is eventually sold, the funds received by Marc would be treated as if they arose on the transfer of his interest to Samiya some years earlier, meaning that he would likely be entitled to claim PPR relief on the transfer. This change is particularly welcome, as a deferred sale is often agreed for the benefit of the children. Such arrangements may now come back into favour for wealthy families who have assets available to meet the needs of the spouse who moves out of the family home.


The changes in CGT rules will assist divorcing couples in minimising and managing the CGT implications of separating their financial affairs, significantly reducing the time pressures and liquidity issues arising from CGT on divorce. Couples will be able take their time to make decisions that are right for them and their family, rather than being rushed into arrangements selected for their tax efficiency.

Professional advice will remain important to ensure that separating spouses understand the tax consequences of proposed settlements, that settlements are structured to take advantage of the new rules, and that all necessary documentation is shared and returns filed. Whilst CGT has historically been the most significant tax to consider when advising on divorce settlements, often posing a hidden trap for the unwary, the new rules should alleviate this extra challenge at what is already a difficult time.

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