The government last week announced proposals to change the Capital Gains Tax (CGT) rules that apply to the transfer of assets between couples who are in the process of separating. The changes are to be introduced in Finance Bill 2022/23 and are intended to come into effect from 6 April 2023.
Under current legislation the no gain no loss treatment on disposals between spouses or civil partners is only available up until the end of the tax year in which the separation occurs. After that, transfers between separated couples are treated as normal disposals for CGT purposes. This can create significant CGT issues for those couples separating close to the end of the tax year.
The new rules will mean that separating spouses or civil partners will be given up to three years after the year they cease living together in which to make a no gain no loss transfer, and unlimited time when the assets are subject to a formal divorce agreement. The aim is to provide a fairer process for couples when distributing assets in a divorce or separation.
In addition some special rules will be introduced that apply to individuals who have maintained a financial interest in their former family home following separation and that apply when that home is eventually sold.
CGT rules provide that the transfer of assets between spouses and civil partners who are living together are made on a “no gain no loss” basis. This means that the spouse or civil partner receiving the asset is treated as acquiring the asset at the same original cost as the transferring spouse or civil partner. Any gain or loss is then deferred until the asset is disposed of by the receiving spouse or civil partner.
Under current legislation, when spouses or civil partners separate the no gain no loss treatment is only available in relation to any disposals up to the end of the tax year (5 April) in which the permanent separation happens. Beyond that date any transfers between the parties will be treated as normal disposals for CGT purposes, with the deemed proceeds being the market value of the asset.
The proposed changes for disposals on or after 6 April 2023 will bring in a much more favourable tax treatment and provide valuable time for both parties in a divorce to organise their financial affairs without the pressure of speeding up the division of assets in order to avoid unwelcome additional CGT liabilities.
The new rules propose that:
- Separating spouses or civil partners will be given up to three years after the year they cease to live together in which to make any no gain no loss transfer of assets.
- No time limit will apply in regard to the no gain no loss treatment for assets transferred between separating couples where those assets are part of a formal divorce agreement.
- 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 sold, will be able to apply the same tax treatment to those proceeds that applied when they transferred their original interest in the home.
- A spouse or civil partner who retains a financial interest in their former matrimonial home will be given the option to claim Private Residence Relief (PRR) when it is subsequently sold.
If you would like further information on the proposed changes to the CGT rules for divorcing and separating couples, please contact our Tax Director, Jenny Marks.
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