Capital Gains Tax and Divorce: Key Changes from April 2020
The new tax year that began on 6 April 2020 introduced significant changes that substantially impact divorcing couples, particularly regarding property transactions and capital gains tax obligations. These reforms have created new compliance requirements and shifted the financial landscape for separating spouses dealing with jointly owned assets.
New 30-Day CGT Rule for Property Transactions
The most significant change is the Capital Gains Tax (CGT) rule, which now requires payment within 30 days of selling or transferring a property. This accelerated timeline represents a fundamental shift from previous reporting requirements and demands immediate attention from divorcing couples.
- If you are divorcing and selling a jointly owned property
- If you are transferring your share to your ex-partner or vice versa
- You must pay CGT within 30 days of the transaction completion
- The 30-day period begins from the date of completion, not exchange of contracts
- Failure to comply results in automatic penalties and interest charges
Mandatory Reporting Requirements
In addition to paying CGT within the shortened timeframe, divorcing couples must also:
- Submit a land transaction report within 30 days of completion
- File a separate CGT return even if no tax is due
- Instruct a qualified tax advisor as early as possible to avoid penalties
- Maintain detailed records of all property-related expenses and improvements
- Calculate provisional tax liability before completion to ensure funds are available
Understanding Principal Private Residence Relief (PPR)
You may be completely exempt from CGT if you qualify for Principal Private Residence Relief. This relief typically applies when:
- You lived in the property as your main residence throughout the entire period of ownership
- The property was your only or main residence during occupation
- You used the property exclusively for residential purposes
This exemption is known as Principal Private Residence Relief (PPR). However, the relief becomes more complex in divorce situations:
- If you moved out more than 9 months before selling or transferring your share, you may owe CGT on the period of non-occupation
- The final 9 months of ownership are always exempt, regardless of occupation
- Periods of absence for work, travel, or temporary relocation may still qualify for relief under specific circumstances
Important: If you have been out of the property for over 9 months, we strongly recommend seeking professional tax advice before proceeding with any sale or transfer.
Significant Changes to Lettings Relief
The April 2020 reforms substantially restricted lettings relief eligibility. Before 6 April 2020, you could claim:
- Lettings relief of up to £40,000 if you let the property after using it as your main home
- This relief was available even if you no longer lived in the property while it was let
From April 2020 onwards, lettings relief only applies in very limited circumstances:
- You were living in the property at the same time as the tenant (shared occupancy)
- The letting arrangement must be genuine shared accommodation, not separate letting
- You must have been physically present during the letting period
Strategic Considerations for Divorcing Couples
Given these changes, divorcing couples should carefully consider their options:
- Timing of property transfers: Consider whether transfers should occur before or after decree absolute
- Order of transactions: Plan the sequence of property sales and transfers to optimise tax efficiency
- Annual exemption utilisation: Each spouse has an annual CGT exemption (£12,300 for 2020-21) that should be maximised
- Holdover relief: Explore whether transfers between spouses can benefit from holdover relief provisions
Penalties and Compliance
Non-compliance with the new 30-day rule carries significant financial consequences:
- Initial penalty: 5% of the tax due if payment is up to 30 days late
- Additional penalties: Further 5% charges at 6 and 12 months
- Interest charges: Compound daily interest on outstanding amounts
- Investigation risk: Late filing increases the likelihood of HMRC enquiries
Professional Guidance Essential
The complexity of these new rules, combined with the emotional stress of divorce proceedings, makes professional guidance crucial. We recommend:
- Engaging both legal and tax advice early in the divorce process
- Obtaining property valuations before any transfers or sales
- Coordinating timing between legal and tax professionals
- Maintaining comprehensive documentation throughout the process
These April 2020 changes represent the most significant shift in property taxation for divorcing couples in recent years. Early planning and professional guidance are essential to navigate these requirements successfully while minimising tax liabilities and avoiding costly penalties.
