Money Corner: Welcome Change to Capital Gains Tax Rules on Divorce

Published: 21/11/2023 07:00

For many years, capital gains tax (CGT) has often been a major stumbling block in financial settlements. Transferring assets around could give rise to tax liabilities in the hands of the transferring spouse who is usually not receiving any sales proceeds with which to pay what is known as a dry tax charge.

In the summer of 2019, matters took a turn for the worse when HM Revenue & Customs (HMRC) amended its guidance to reverse its previous view that CGT holdover relief for business assets could apply to transfers on divorce. As always with guidance of this nature, it did not have any particular weight in law unless or until this guidance was backed up by case-law. As we awaited a test case on the matter, tax practitioners had to amend their advice to take account of this.

Fast forward to July 2020, the Office of Tax Simplification (OTS) issued a ‘call for evidence’ on the topic of CGT. Amongst the evidence submitted to the OTS by tax practitioners and also by Resolution were representations that the changes should be made to reduce the CGT burden that often arose on divorce. Whilst we didn’t get the general exemption that we called for, the announcements that were first made in November 2021 are, in many ways, the next best thing.

2022 was a political rollercoaster which featured four different Chancellors and more U-turns than a driving instructor, many of them on tax. Thankfully, this announcement made its way into the Finance (No 2) Act 2023 which received Royal Assent in July this year.

New rules

These new rules all apply to disposals on or after 6 April 2023.

Extension of no gain, no loss disposal period

The main change is the extension of the period during which a transfer between spouses continues to qualify for the no gain, no loss (NGNL) treatment.

Previously, the period that this treatment applied to could be very short as it only lasted from the date of separation until the end of the tax year of separation. So, for example, a couple who separated on 10 January would have less than 4 months to make a transfer under the NGNL provisions.

Under these new rules, in the first instance, the NGNL treatment will apply to transfers that take place before the earlier of:

  • the last day of the third tax year after the year in which the couple ceased to live together; or
  • the day on which the court grants an order or decree for the couple’s divorce, dissolution or annulment of their marriage or civil partnership.

Consequently, a couple who separates on 30 September 2023, could have up until 5 April 2027 to transfer assets under the NGNL rules.

The NGNL treatment period is extended indefinitely for assets that separating spouses or civil partners transfer between themselves as part of a formal divorce or dissolution agreement.

Implications for financial settlements

The extension of the NGNL treatment should be seen as a deferral of CGT rather than an exemption.

Where an asset is transferred under the NGNL treatment, the recipient spouse takes on the original base cost of the asset. This means that, when that asset is disposed of the recipient spouse will have a higher CGT liability than would otherwise be the case. It is therefore essential that that recipient spouse understands this when considering the financial settlement.


This is best illustrated by the following example:

Consider an investment property initially owned solely by the husband and transferred to the wife under an NGNL transfer on 30 April 2023.

Purchase price in 2015 – £200,000.

Market value as at 30 April 2023 – £350,000.

Disposed of by wife in 2026 for £600,000.

The CGT base cost is the original purchase price of £200,000.

The CGT liability is therefore based on a gain of £400,000 (being £600,000 less £200,000) rather than the gain in value during the wife’s period of ownership of £250,000 (being £600,000 less £350,000).

Specific provisions applying to the former matrimonial home

Before these changes, CGT main residence relief was only extended to incorporate a transfer of a property from the absent spouse to the recipient spouse so long as that spouse continues to occupy the property as their main residence. This relief was also conditional on the absent spouse not having nominated a new dwelling as their main residence.

Under the new rules, the main residence relief rules are extended indefinitely to the absent spouse on a disposal of the property to a third party. Once again, this relief is conditional on the absent spouse not having nominated a new property as their main residence.

It is important to consider the position of the absent spouse, if they have acquired a new residence, as opposed to to renting one. It is important to quantify the potential loss of CGT main residence relief on the new home as it is possible that this will be of greater value that the tax liability being saved on the former matrimonial home.

Deferred disposal

From a legal perspective, court orders can provide for the former matrimonial home to be initially retained for the use of one spouse in such a way that the absent spouse retains a financial interest in the future disposal of the property.

This could be achieved by way of a Mesher order or a deferred charge order.

For both mechanisms, these arrangements are treated as having two disposals for tax purposes.

Under a Mesher Order, both spouses dispose (disposal 1) of their interests in the former matrimonial home into a trust for sale. The terms of the trust being that that the remaining spouse and the children are able to continue living in the home rent free until a specific future event, such as the youngest child reaching 18 or ceasing in full-time education. Once the event occurs, the property is sold (disposal 2).

Under a deferred charge order, the absent spouse transfers their share of the former matrimonial property to the remaining spouse (disposal 1). This disposal provides that the absent spouse will receive a future sum of a fixed share of the sales proceeds received when the property is sold in the future. The future sale is usually triggered by a specific event again, such as the youngest child reaching 18 or ceasing in full-time education. Disposal 2 occurs when the property is then sold.

Before the new rules, a Mesher order had a different tax analysis to a deferred charge order. Depending upon the value of the property, often a Mesher order gave a better tax outcome. This is because main residence relief could also apply to disposal 2 whereas it does not apply to disposal 2 under a deferred charge order.

However, the trust created under a Mesher order can cause inheritance tax charges to apply if the value of the property is high enough.

Under the new rules, main residence relief can also be claimed on disposal 2 under a deferred charge order.


These changes are a positive step. They will mean that moving assets between spouses as part of a financial settlement can be done more easily by avoiding dry tax charges.

The extension of main residence relief also means that structures can be put in place to provide accommodation for the children of a divorcing couple without penalising the absent spouse with tax liabilities.

Where a clean break settlement is not desirable, deferred charge orders have become more attractive from a tax perspective because of an extension to main residence relief.

Whilst these changes make tax liabilities arising on transfers less likely, there are still ongoing tax implications that arise from matters such as reduced CGT base costs or the possible impact of losing main residence relief on another property. These make it important that tax advice is still obtained before a financial settlement is agreed.

©2023 Class Legal
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