The government has published draft legislation and an accompanying policy paper, Capital Gains Tax: Separation and Divorce, detailing changes to the rules applying to transfers of assets between separating spouses and civil partners. The draft legislation will form part of the Finance Bill 2022-2023. The impact of the changes will be significant for divorcing couples, affording them more time to transfer assets between themselves without incurring capital gains tax (CGT) charges.
Knowledge development lawyer Carla Ditz reviews the law surrounding CGT on divorce as it currently stands and outlines the proposed changes.
CGT on divorce – current position
The timing of the transfer of an asset between spouses is crucial under the current law.
(i) Where an asset is transferred during the tax year in which the couple separate
At present, for couples to transfer assets such as property, business interests and shares at ‘no gain/no loss’, the assets must be transferred during the tax year of separation, ie no later than 5 April. If this is achieved, no CGT is payable, and assets can be transferred between spouses and civil partners as if they remain living together.
(ii) Where an asset is transferred after the tax year in which the couple separate
Once the tax year of separation has ended, the spouses lose the benefit of the no gain/no loss rule and transfers are treated as normal chargeable disposals for CGT purposes, ie on transfer, the asset is deemed to be ‘sold’ at market value. This may result in a significant CGT liability to be paid by the transferring party (subject to any exemptions, including Private Residence Relief).
For example, if a couple separated in October 2021, provided a transfer takes place no later than 5 April 2022, the transfer is made at no gain/no loss with no CGT charge. The window for opportunity to make a transfer at no gain/no loss, therefore, narrows the closer you are to the end of the tax year.
In a few cases, the 6 April deadline proves helpful as it can prompt the couple to resolve their financial affairs on divorce more speedily, but this rarely happens. More often than not, the deadline is unworkable and places added stress on the couple at an already turbulent time.
In most cases, the timeframe is unachievable, particularly in complex financial settlements where negotiations are protracted or court hearings are listed many months ahead, leaving 6 April as an irrelevance. In practice, transferring assets before the end of the tax year of separation is usually unrealistic and can result in a potentially hefty tax bill to be paid out of the marital pot. This comes at a time when funds are required to enable parties to re-house and meet future needs, including those of any children.
Changes to be introduced from 6 April 2023
As summarised in the policy paper, the changes to the rules surrounding CGT will include:
- separating spouses or civil partners to be given up to three years after the year they cease to live together in which to make no gain or no loss transfers
- no gain or no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal court order
- a spouse or civil partner who retains an interest in the former matrimonial home to be given an option to claim Private Residence Relief when it is sold
- individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold, to be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the home to their ex-spouse or civil partner
What do the measures mean in practical terms?
The policy objective surrounding the new measures is to make the CGT rules fairer for spouses and civil partners who are in the process of separating. Once the new rules are implemented, couples will have more time to transfer assets between themselves without incurring a charge to CGT. Where that transfer is pursuant to a court order, the couple will have an unlimited time to transfer those assets. Extending the no gain/no loss window for separating couples will help to lessen some of the financial pressure on the parties at the point of divorce.
Toby Atkinson, a partner in the Divorce and Family department at Stewarts, said: “The current rules surrounding CGT on divorce are not practical nor reasonable in an environment where the family courts are overburdened, and court hearings are listed many months into the future. Even where couples seek to resolve their finances using alternative dispute resolution methods such as mediation, arbitration or solicitor-led negotiation, the date of 6 April can seem artificial and an unachievable target. The draft legislation is a welcome measure that will enable the family’s financial resources to be allocated where they are needed most.”
The changes are expected to take effect on disposals that occur on or after 6 April 2023.
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