Capital Gains Tax on financial transfers in divorce: A much-needed change to the rules?

Janine Hutson from Harrison Drury’s divorce and family law team explains recent recommendations to help reduce the unfairness of paying Capital Gains Tax on the transfer of assets between separating couples.

Under current rules separating couples can transfer assets between them without a liability to pay Capital Gains Tax (CGT) if the transfers take place during the same tax year as their separation.

The current rules unfortunately create unfairness for some couples. For example: if a couple separates at the end of March 2022, they will only have until April 5, 2022, less than a month, to transfer their assets between themselves to avoid CGT.

However, if a couple separates on April 6, 2022, they have until April 5, 2023, a much greater period of time, to transfer assets between them without paying the tax.

The recommendations in a report by the Office of Tax Simplification (OTS) would assist separating couples in managing their Capital Gains Tax liabilities and avoid this unfairness.

The report recommends that separating couples should be able to transfer assets between themselves without paying CGT if the transfers take place either:

• Before the end of the tax year two years after the date of their separation, or
• By the timeframe set in their financial agreement which has been approved by the court.

This recommendation means that if a divorcing couple records their financial settlement agreement with the court, (which would always be recommended), they will not need to pay Capital Gains Tax, as long as the transfer of their assets takes place within the timeframe set out in the agreement.

If adopted, this recommendation would be a welcome change to the current rules and would avoid the current unfairness suffered by couples who separate late within a tax year.

Divorcing couples should give careful consideration to the resolution of financial matters following separation. To learn more, read our blog post : What is a consent order and do I really need one?

If you require any further advice regarding financial settlements, the transfer of assets in separation, or to seek specialist legal advice, please contact Harrison Drury’s divorce and family law team on 01772 258321.