According to HM Revenue & Customs (HMRC) most recent available statistics for tax year 2018/19 at least £8m was paid in capital gains tax (CGT) by just under 300 taxpayers, who stated divorce or separation as the reason for the gain in their tax returns.

    The true figure will be much higher than reported as there's no requirement for taxpayers to give the reason for transferring or disposing of assets - and in 2018 there were more than 91,000 divorces.

    What seems apparent is the unforeseen cost (in perhaps an already expensive situation), of an average CGT bill of about £27,000.

    The Office of Tax Simplification raised this as an issue in their 2021 report titled Capital Gains Tax Review: Simplifying practical, technical and administration issues. It took the view that the current treatment of capital gains on separation and divorce was totally unsatisfactory and must change.

    To benefit from the generous ‘no gain no loss' provisions, married couples must be ‘living together' at some point in the relevant tax year. HMRC will treat spouses or civil partners as ‘living together' unless they're separated under a Court Order, or deed of separation, or separated in circumstances in which the separation is likely to be permanent. For transfers made in the tax years after separation, they're treated as a disposal at market value and a chargeable gain may arise.

    The quickest a consenting couple can get divorced is between four and six months. However, the average time in England and Wales between applying for, and securing, a divorce in 2020 was just over a year. Where there are any disputes, it can be far longer.

    Even if separation took place at the beginning of a tax year, the chance of, starting legal proceedings, agreeing how assets should be split, and then transferring them, is highly unlikely to be achieved by the end of the same tax year.

    Home is where the heart is

    For many, the most valuable asset can be their home. CGT isn't usually an issue as Private Residence Relief (PRR) applies. On separation, however, when one party moves out, there may be a chargeable gain if the period between moving out and the transfer or sale of the property is longer than the final nine month permitted exemption period.

    The charge can be mitigated, in some cases, by an election allowing the former home to be treated as the main residence of the transferring individual until the earlier of the date of transfer, or the date on which the property ceases to be the only or main residence of the individual to whom the property is transferred.

    It should be noted that if the departing individual acquires another property, they'll not obtain PRR on the new property for the period that the other property is still deemed to be their principal residence.

    A relaxation of the current legislation is to be introduced in the 2022/23 Finance Bill. The main change is that separating spouses or civil partners will be given up to three years, after the tax year they cease to live together, in which to make no gain or no loss transfers. Where assets are being transferred as part of a formal divorce agreement there will be no time limit.

    As regards the matrimonial home, there's more good news, as a spouse or civil partner who retains an interest in the former matrimonial home will be given the option to claim PRR when it's sold. Also, where an individual has transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold, they'll be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the home to their ex-spouse or civil partner.

    If the legislation goes through as planned, it'll be effective in relation to transfers that take place on or from 6 April 2023.

    There's no doubt that these proposed changes will give the parties considerably more breathing space to allow them to sort out their financial arrangements without having to consider a tax penalty and, additionally, the changes also remove a layer of complexity.

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