Sandy Hills, solicitor in the family team at CWJ, considers the incoming Spring Finance Bill 2023 that should bring with it a welcome change to CGT rules for separating couples.
Capital Gains Tax (CGT) is not charged on an asset transfer between spouses or civil partners who live together. For example, as part of a couple’s tax planning, a wife could transfer assets such as property, shares, personal possessions, business assets, cryptocurrency, etc, to her husband without paying the 28% tax on the gain. This tax relief does not apply following separation and/or divorce which can lead to an unwanted tax bill at a difficult time.
While the timings have not been confirmed, the CGT rules for separating couples are due to be revised. The intention of the change is to relieve the current pressure a looming (and often large) CGT bill puts on separating couples to reach a financial agreement. This change is specifically targeted to assist more complicated financial proceedings and reduce the need and cost of onerous CGT computations and reports.
Currently, there is only full relief available if separating couples can transfer assets, as part of separation or divorce, on a “no gain no loss” basis if the transfers occur within the same tax year the couples separated. This often puts undue pressure on couples to finalise an agreement and enact the transfer before the end of the next financial year to avoid a hefty tax bill.
Following the transfer, the gains (or losses) are deferred until the asset is disposed of by the receiving party and that party will be deemed to have acquired the relevant asset at the original purchase price.
The proposed change, which was meant to come into effect from 6 April 2023 before procedural delays, is to extend the deadline to transfer assets.
The “no gain no loss” rule will apply for a longer period, up to three years after the tax year in which the couple stop living together. If the transfers take place within this proposed timeframe, no CGT is payable.
Most significantly, for married couples, there will be no time restriction to transfer assets between themselves if the transfer is part of a formal divorce agreement.
Additionally, a spouse or civil partner who retains an interest in the former matrimonial home will be given the option to claim Private Residence Relief (PRR) once the property is sold.
Finally, if an individual has a Mesher Order in their favour, they will be able to apply the same tax treatment to those proceeds received that applied when they transferred their original interest in the home to their ex-spouse or civil partner. For clarity, the circumstances surrounding the existence of a Mesher Order is when one party has transferred their interest in a former matrimonial home to their ex-spouse or civil partner but remains entitled to a percentage of the proceeds of sale once sold.
While separating couples will still need to seek legal and tax advice throughout their separation, these proposals are a big step in assisting couples part ways in a more tax efficient manner while reducing costs.
Please note we are not able to provide our clients with tax advice. If you have questions pertaining to Capital Gains Tax or another other tax issue, please contact a professional accountant or tax adviser.
To talk to one of our family law advisers, please call us on 01689 887887.