The unhappiest time of the year: the tax cost of divorce

Transfer of assets between spouses or civil partners who are living together takes place at no gain and no loss. But, under the current rules, when couples separate, the no gain/no loss treatment is only available until the end of the tax year of separation. Afterwards, transfers are treated as normal disposals for capital gains tax.

The current rules mean that a couple that separates in January will only have a few weeks to come to an agreement and transfer assets before a tax charge will apply. But with the average time between applying for and securing a divorce being 53 weeks in 2020, the current rules are widely viewed as unfair.

Getting these strict timings wrong can be costly. Analysis of the statistics suggests than 50% of married couples have wealth of more than £500,000, and with financial agreements being relevant for a third of divorces, the current rules produce an estimated £5m capital gains tax bill annually.

The length of time given to separating couples is clearly inadequate. The government recognised this, and draft legislation was published in the summer of 2022, which set out an increased period for no gain/no loss transfers during separation to three years, and an unlimited time if the assets are the subject of a formal divorce agreement.

The Autumn Statement confirmed the new rules would be introduced on 6 April 2023 as originally announced. However, with all the recent tax policy u-turns, couples might reasonably be nervous as to whether, or when, the extended rules might come into effect. This legislation is absent from the draft Finance Bill 2022-23, and it is not yet clear whether this will form part of the Spring 2023 Finance Bill, the likely last resort if these new rules will apply from 6 April 2023. As the Spring Budget does not usually take place until March, couples may feel uncertain about the position for months to come, adding unwanted stress to an already emotional time.

For individuals looking to finalise their negotiations and move on, assuming the extended period now applies, they may find themselves unwittingly creating a tax bill. Individuals should watch for announcements closely and seek professional advice to minimise the tax costs of their divorce negotiations. For some already past the end of the tax year of separation, but still within three years, it may be wise to delay transfers of assets on the expectation that the extended time window will come into force, eventually.