Amongst some of the more gloomy fiscal news stories of recent times came some welcome relief for divorcing couples in the form of changes to Capital Gains Tax rules which are due to come into effect from 6th April 2023.
Under the new rules, separating spouses or civil partners will be given up to three years (rather than one) after they cease living together to make transfers on a no loss no gain basis, and unlimited time when the assets are the subject of a formal financial consent order or an order of the court in financial remedy proceedings.
What the rules were
Section 58 of the Taxation of Chargeable Gains Act 1992 deals with the transfer of assets between spouses and civil partners. An individual does not usually have to pay Capital Gains Tax when disposing of assets to his or her spouse or civil partner before a divorce is finalised; this is sometimes referred to as transfers made on a “no gain, no loss” basis.
After separation, if a separating couple has lived together at any point in the tax year (from 6th April to 5th April of the next year) that the asset is transferred, the normal rules for spouses and civil partners apply. Otherwise, transfers are treated as normal disposals for Capital Gains Tax purposes which in some cases has led to an unexpected tax liability being incurred if not properly advised by a tax specialist. The rules for calculating a potential liability are complex and professional help should be sought from an accountant or a tax adviser for assistance to determine what, if any, liability will arise.
This timeframe can have, and has had, a significant financial impact on parties who are separating, particularly if there are delays in reaching a financial agreement.
What the rules will be
From 6th April 2023 there will be changes to the Capital Gains Tax that will apply to disposals. The aim of the changes is to make the rules fairer for spouses and civil partners who are in the process of separating, and allow more time for them to transfer assets between themselves without incurring a Capital Gains Tax liability.
Legislation has been introduced in the spring Finance Bill 2023 to make amendments to section 58 of the Chargeable Gains Act 1992 regarding parties who are married or in a civil partnership, but no longer live together. In these cases, “no gain no loss” treatment will continue for disposals made before the earlier of:
- The end of the third tax year after that in which the parties ceased to live together; or
- The date on which the parties divorce, their marriage or civil partnership is dissolved or annulled.
Another amendment will provide for a spouse or civil partner who retains an interest in the former family matrimonial home to be given an option to claim Private Residence Relief or “PRR” when it is sold to a third party.
Further, individuals who have transferred their interest in the former matrimonial home to their former spouse or civil partner, and are entitled to receive a percentage of the proceeds when that home is eventually sold, will 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 former spouse or civil partner.
These changes have the potential to save separating parties thousands of pounds. There are, however, plans for the Capital Gains Tax annual exemption to be reduced from £12,300 to £6,000 in April 2023 (and will decrease further to £3,000 in 2024).
Separation can be a very stressful time, and can give rise to financial concerns to the parties. The tax implications of a potential settlement are not always considered in as much detail as they should be and it is therefore important to obtain expert tax advice at the earliest opportunity post-separation.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at April 2023.