Capital Gains Tax Update 2025

Early advice

Considering the division of assets early in divorce or civil partnership dissolution, and taking appropriate advice, has always been critical, but especially so when considering the potential impact of Capital Gains Tax (CGT).

As a broad basis, CGT is levied on the occasion of a disposal by an individual (to which UK tax is applicable) of a capital asset where the disposal value is greater than the acquisition cost. in relation to disposals between “connected” parties, the disposal is generally deemed to take place at market value. However, it has long been established that transfers between spouses (who are living together) are free of CGT.

S.58 of the Taxation of Chargeable Gains Act 1992 governs the application of CGT in relation to spouses who are living together. Moreover, S.225B TCGA deals with the disposal of assets in connection with divorce. Although both of the above provisions provide for a degree of relief from a CGT in limited circumstances, these reliefs can be restrictive in modern separation/divorce situations.

Many couples going through separation do not take into account the tax implications and timing of the transfer of assets between them and some are hit with unwelcome and unnecessary CGT bills, at an already difficult time. 

As a reminder, the current CGT rules on divorce:

Separating spouses or civil partners are given up to three tax years after the tax year that they stop living together in which to make a ‘no gain, no loss’ disposal for CGT purposes (although this time period would end earlier if the court pronounces the final order or decree absolute).

For example, if the couple separate on 22 August 2025, the ‘no gain/no loss’ rule will apply to any transfers made until 5 April 2029 (or the date of divorce if earlier).

This is effectively a relieving provision for couples that are treated as a tax unit rather than separate individuals (for the purposes of CGT only). It does not avoid tax on any later disposition of the asset transferred between the spouses or former spouses as the acquiring spouse inherits the base cost/acquisition value of the disposing spouse, but it is a practical and logistical tool ensuring that a chargeable disposal for CGT is not triggered as a result of financial arrangements on divorce (where possible and legitimate).

The ‘no gain/no loss’ rule continues to apply to assets that separating spouses or civil partners transfer between themselves with no time limit, so long as it is part of a formal agreement (known as a consent order) within divorce or dissolution proceedings, that is approved by the court or via a court order made within financial remedy proceedings.

The position can therefore be summarised as follows:

CGT changes

The Autumn 2024 budget introduced a package of changes to CGT, with certain changes taking effect immediately and others being phased in gradually. 
Changes from Budget Day (30 October 2024)

• Lower rate of CGT for basic taxpayers rose from 10% to 18% and the higher rate of CGT for higher rate taxpayers rose from 20% to 24%.
• The CGT rate applicable to trustees and personal representatives rose from 20% to 24%

Phased changes to Business Asset Disposal Relief (BADR) and Investors’ Relief

• From 6 April 2025, the CGT rate that applies to BADR and Investors’ Relief will rise from 10% to 14%.
• From 6 April 2026, the CGT rate that applies to BADR and Investors’ Relief will rise again to 18%.

For an example of how the updated reliefs will apply, please see our previous article.

In light of the increased CGT rates, it is more important than ever to ensure that advice is obtained as to how to reduce or mitigate this either by way of a financial consent order or ensuring any transfers occur within the three year time limit. 

Potential international perspective

There are always exceptions to every rule and international clients must remain particularly vigilant. Consideration should be given to those individuals who are dual tax resident (tax resident in more than one jurisdiction) and where recourse may be needed to any relevant double tax treaty between the jurisdictions of residence (remembering that double tax treaty relief may only apply to the extent that tax is levied in the other jurisdiction). A classic example of where care is needed is that of US citizens holding UK residential property. Despite the fact that principle private residence relief may apply to the disposal between spouses from a UK perspective, the US tax authority does not recognise a similar spousal exemption for disposals between spouses of residential property abroad. This can give rise to a gain and CGT liability in the US (indeed this is an issue not unique to spouses that are divorcing but applies generally to spousal transfers of UK residential property).

Comments

Although the new provisions increase the potential CGT liability, this can still be mitigated by either obtaining a consent order or ensuring that transfers are completed within three years of separation.  

The new budget changes still require separating spouses to take good legal/tax advice and there will still be a need in some cases for a consideration of timing.  However, the rules do provide a framework for separating spouses to part ways in as tax efficient a manner as possible.

In all cases, CGT should be considered at an early stage of separation or divorce and advice taken at the outset as to the potential ‘best case’ scenario.; This may play a tactical and practical role in negotiations and certainly seek to avoid a ‘dry’ CGT triggering event at a time when cash is not available ( i.e. has not been generated) to pay for the same.

As ever, there is the perennial reminder that long term partners who are not married or in a civil partnership will not benefit from any of the above provisions (old or new) upon any separation.: There is no such thing as common law spouses for tax purposes!