Divorcing your partner can be a stressful and painful personal matter, whilst the legal responsibilities and processes can really add to the misery of the whole situation. When it comes to Capital Gains Tax (CGT), the rules when transferring assets have long been considered archaic and extremely unhelpful, adding to burden of going through a divorce.
Presently, spouses and civil partners can only transfer chargeable assets such as property, shares or business interests between them without incurring CGT up to the end of the tax year in which separation occurs. After that, they are treated as connected parties until the divorce is finalised. The new proposed changes put an end to this, providing ample time in which to make no gain or no loss transfers of assets between parties without incurring a hefty tax bill.
We break down the new changes to CGT rules for divorcing couples, why this has come about, and the effects it will have on individuals, households, and families up and down the UK…
What Are The Changes To CGT?
The current rules state that, effectively, any gains or losses from transfers are deferred until the asset is disposed of by the receiving spouse or civil partner. The spouse or civil partner is treated as having acquired the asset at the same original cost as the transferor.
The main proposed changes to CGT, scheduled to be introduced from 6th April 2023, for separating couples are:
- separating spouses or civil partners will 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 divorce agreement
- a spouse or civil partner who retains an interest in the former matrimonial home will be given an option to claim Private Residence Relief (PRR) 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, 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
Nordens’ Tax Manager, Adam Truluck, believes, “Overall I think this change is a much needed one and will be welcomed by all. Up to now married couples who have separated have only had a small amount of time to arrange their assets without paying any tax. At most they would’ve had a year if separated in April. For couples that separate in January, they would only have 2/3 months, or even worse in March leaving them with a matter of weeks or days.
This leads to situations where one of the individuals would be left with a huge tax bill or being forced into receiving less of the assets than they are entitled too. Moving forward, separating couples will now have much longer to organise their assets which will allow them to reach a much more favourable outcome. It will also allow time to be settled in court or legal advice sought after if need be.”
Why Have The Changes To CGT Come About & What Is The Expected Impact?
Overall, the changes to CGT will give spouses and civil partners more time to transfer assets between themselves without incurring tax charges, resulting in a fairer system for couples separating.
These proposed changes to CGT have come off the back of recommendations by the Office of Tax Simplification (OTS) which stated ‘the government should extend the no gain no loss window on separation to the later of:
- the end of the tax year at least two years after the separation event
- any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent processes in Scotland’
The government policy paper on the CGT changes predicts ‘a positive impact on individuals by extending the period of time available to give separating couples at least three years to make no gain or no loss transfers between themselves for capital gains tax purposes. This will especially benefit those parties involved in more complex proceedings, as it means that more time can be spent on the divorce considerations, rather than Capital Gains Tax considerations.’
We hope this has outlined to you the proposed changes to the CGT rules expected to come into force in April 2023. If you’d like to know any further information on Capital Gains Tax, or anything accounting related for that matter, please do not hesitate to get in contact with us at Nordens, where one of our trusted advisors would be happy to talk you through your query.