Proposed Capital Gains Tax changes likely to hit divorcing couples hard, says law firm Royds Withy King

The proposed increases to capital gains tax (CGT) suggested by the Office for Tax Simplification in early November are likely to hit divorcing couples hard, warns Royds Withy King.

Simon Bassett, Partner and Head of Family at Royds Withy King, explains:

“The CGT regime changed in April 2020, with the qualifying period for principal private residence (PPR relief) reduced to just nine months, lettings relief all but removed and, crucially, any tax payable in full within 30 days of the sale or transfer of an asset, known as a disposal.

“In most divorce cases, a physical separation cannot be delayed until a financial settlement has been finalised, leading to one of the parties agreeing to move elsewhere in the interim. Whilst this may be the best decision when emotions are running high, it can create unforeseen and unnecessary tax liabilities.

“CGT can arise when certain assets are either sold or transferred between parties, even if no money is actually changing hands. As CGT is now payable in full within 30 days on such a sale or transfer, we are seeing separating couples struggling to raise the necessary funds within this tight timeframe, particularly if also trying to finance the purchase of a new home and provide financial support for the children.

“This is particularly problematic when assets are simply transferred between spouses during a divorce rather than being sold, which may mean there is no physical cash to meet the tax. In a number of cases, assets that were intended to provide financial security for either party or the children are now having to be sold.

“This additional pressure can have a major impact on the wellbeing of a divorcing couple, particularly where children are involved. In the majority of cases, a divorcing couple simply do not have the luxury of deferring the sale of an asset to help cushion the effect of CGT.

“Divorce settlements now, more than ever, have to factor in the impact of having to pay CGT within the 30-day window as well as the loss of other reliefs, adding further complications to an already difficult process.

“Any increase in CGT rates, particularly if aligned with income tax, will cause significant difficulties for divorcing couples and their families and has the potential to hit them disproportionately hard. Insufficient consideration is given to the impact of such changes on divorcing couples.”

Kindly shared by Royds Withy King

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