On 22 July 2022, the Government released draft legislation which proposes to change the capital gains tax position for divorcing couples and separating civil partners. If implemented, the proposed changes will be in force from 6 April 2023.
What is Capital Gains Tax (CGT)?
CGT is tax on the profit when you transfer, sell or otherwise dispose of an asset (property other than your main home, shares, business assets etc) that has increased in value.
You pay tax on the profit, not the actual amount that you receive for it.
The current CGT position for divorcing couples
Under the current legislation, when spouses or civil partners permanently separate there is a ‘no gain, no loss’ treatment on the transfer of assets that occur within the same tax year as the separation and prior to the final divorce or dissolution order. This means that there is no immediate tax payable on the transfer and each party takes ownership of the asset at the original base cost. However, once the tax year of permanent separation is complete any transfers after this are deemed at the market value.
For example, if Mr and Mrs A separated in December 2021, they would only have until 5 April 2022 to transfer assets under the ‘no gain, no loss’ regime. Any transfers on or after 6 April 2022 would be subject to the usual CGT rules (subject to any annual exceptions, reliefs and losses available).
Any assets sold as part of separation, divorce or dissolution proceedings are also subject to the usual CGT rules.
After the tax year of permanent separation, spouses and civil partners are each entitled to tax relief on their own principle private residence (PPR) or main home. If either has more than one residence, they are separately entitled to nominate which property should be considered their main residence for the purpose of PPR, providing certain conditions are met.
If a spouse or civil partner moves out of the matrimonial home, a transfer of the property which takes place after the tax year of permanent separation will be deemed to take place at market rate. If the spouse/civil partner that has moved out of the family home has been absent for more than nine months, the property will be deemed not to have been their main residence for the full period of absence, so any resulting gain will not qualify for PPR. It may be possible to extend the PPR rules to stop the triggering of a tax charge in such an instance, however, an individual can only ever have one main residence for PPR which may mean sacrificing tax relief on a new residence.
The proposed changes under the Finance Bill 2022/23
1. Separated spouses or civil partners have up to three years to transfer assets between themselves without a CGT charge.
This change simply extends the current time limit from the same tax year of permanent separation to three years following separation and before divorce or dissolution within which couples can transfer assets under the ‘no gain, no loss’ regime.
2. Separating spouses or civil partners who transfer assets between themselves as part of a formal divorce agreement or order have unlimited time to complete the transfers without being subject to a CGT charge.
This goes a step further than the first change, to completely remove the time limit for the transfer of assets with ‘no gain, no loss’.
3. The spouse or civil partner who leaves the former family home, will be given an option to claim PPR Relief when the property is sold or transferred as if it had remained their only or main residence.
Under these new proposals, the absent individual will be able to claim PPR on the sale or transfer of the former family home even for the periods in which they have been absent. This is providing that the sale/transfer and absence is due to divorce.
4. Additional relief for individuals who enter into a deferred charge arrangement over the former family home.
Currently, when a party enters into a deferred charge over the former family home, the charge is treated as a new asset for CGT purposes and when the charge is paid any increase in value is subject to CGT. Under these proposed rules, that party would be able to claim PPR on the gain and remove their CGT liability.
Benefits
The proposed changes are a welcome change in the family law world, especially where family courts are overburdened, and delays are increasingly common.
It will make the process of distributing assets upon separation a much fairer process. There will be an extra benefit in complex cases as more time can be spent on the divorce considerations themselves rather than the CGT considerations.
The changes will stop divorcing couples incurring an immediate CGT liability at a time when neither party has sufficient cash to settle the liability and will also help to avoid further depletion of household income or wealth that may had to have been used in order to meet the tax liability.
For further advice and information, or if we can be of assistance regarding any other matrimonial or family matter, please contact our family team.