No-fault, no loss, no gain: Changing divorce law and Capital Gains Tax

Abigail Lowther, Hall Brown

Abigail Lowther, Senior Associate Solicitor at Hall Brown

News that long-awaited divorce law reform is to be delayed is, perhaps unsurprisingly, regarded as a frustration for couples across the region and the family lawyers like myself who advise them.

The Government had been hoping to put the main planks of the Divorce, Dissolution and Separation Act into practice sometime this autumn.

However, the Courts Minister Chris Philp last week disclosed that the timing had been “ambitious.”

Instead, the provisions will only come into force on the sixth of April next year.

It’s hard to think of a more down-beat way of celebrating the first anniversary of the Act gaining royal assent.

After all, it fairly rattled its way through parliament compared to the often glacial pace of other pieces of legislation, its progress accelerated by a determination to end what ministers described as a marital ‘blame game.’

That ambition would, they maintained, be assured with the introduction of ‘no-fault’ divorce.

Forty-three per cent of all the divorces in England and Wales during 2019 were on the grounds of unreasonable behaviour – effectively, one spouse detailing how their partner’s misconduct had led to the irretrievable breakdown of their marriage.

No finger-pointing, so the argument goes, means less friction in a divorce, something which is especially desirable when children are involved.

Putting off any process or scenario which results in a more pragmatic – if not truly amicable -separation is, of course, not great.

However, some commentators have been quick to suggest that the deferral might, in fact, have a “silver lining.”

Divorces, they say, may be concluded more quickly under the existing regime than the incoming system, which will see a minimum six-month wait before the necessary decrees are granted.

Such a position is instantly undermined by a glance at official figures showing that even before lockdown derailed and delayed much of the work of family courts, only two-thirds of divorcing couples were obtaining their decrees absolute within a year of issuing a petition, let alone tying up the financial aspects of their split.

I happen to think that although the extra months before ‘no-fault’ divorce takes effect may seem a taxing prospect for husbands and wives who reckon that their marriages have reached the point of no return, they can still use the time wisely from a tax perspective.

As the law stands, anyone selling residential property for a profit is deemed liable for Capital Gains Tax (CGT), with that bill falling due to HMRC within 30 days.

Divorcing spouses, however, are allowed to transfer property to each other in the tax year following their separation without incurring an immediate CGT liability as there is neither a financial loss nor a gain. The tax need only be paid when that property is eventually sold.

It can help someone contemplating newly single life considerably, easing pressure on available cashflow.

With a large increase in the number of buy-to-let landlords during 2020, the CGT question has become a relatively routine part of the preparations for the financial settlement on divorce.

Yet it can also represent something of a complication. If people decide in the early months of each calendar year that they want to end their marriages, they are left with little time to obtain their divorce decrees and complete any financial negotiations before the tax year ends.

Managing discussions about CGT are, in my experience, generally easier to do if there’s a level of trust. Couples who are engaged in apportioning blame are less likely to be willing to entertain talk about tax in an open manner.

Having said that, the reality that setting emotion to one side in order to reap rewards can significantly defuse any tensions.

That’s why I believe spouses in failing or even failed marriages should focus on using the time before next April to their mutual advantage.

It is a sad fact that divorces do happen. Parting on good terms and minimising one’s tax bill into the bargain can be a helpful postscript to any relationship.