The Government has announced plans to relax capital gains tax (CGT) rules in divorce settlements, giving spouses and civil partners more time to transfer assets without incurring CGT charges.
If the new rules are approved, they will come into effect from 6 April 2023.
As it stands, couples who are married or in a civil partnership can transfer assets between each other on a ‘no gain-no loss’ basis, so there is no CGT to be paid by the transferring spouse/civil partner at the time of transfer.
However, when the marriage breaks down and the couple separates, the no gain-no loss rule applies only in the financial year of separation, i.e. until the following 5 April.
“This doesn’t leave much time for the separating couple to deal with the emotional fallout and to work out how assets should be shared before a tax liability occurs,” said David Anstee, a family law specialist at KWW Solicitors. “It’s especially unfair on those couples who separate close to the end of the tax year.”
After the tax year of separation, the couple are connected for CGT until their divorce is finalised. Any transfer of assets after the year of separation is deemed to be at the market value, which often creates a gain for the transferring spouse/civil partner, regardless of whether they actually receive a payment. They then have 60 days after the transfer to settle the CGT liability.
The proposed changes, if enacted, will extend the no gain-no loss rules by up to three years – or longer if the disposal is part of a formal divorce agreement.
Other changes impact the tax position of the former family home. Under the proposed changes, a spouse or civil partner who continues to retain an interest in the former matrimonial home will be given an option to claim Private Principal Residence Relief (PPR) when it is sold, reducing their liability to CGT.
Currently the relief is restricted where the sale is more than nine months after they have ceased to occupy the property as their main home.
In addition, where a former spouse is entitled to receive proceeds on the eventual sale of the matrimonial home, the draft legislation would mean they are entitled to claim PPR.
“If couples or civil partners are currently in the process of going through a divorce, if possible, it may be beneficial to delay the transfer of assets until 6 April 2023,” said David Anstee. “In any event, we would recommend professional tax advice is sought.”