On the 20th of July 2022, the government announced their plans to change the rules that apply to the transfer of assets between spouses and civil partners who are in the process of separating. The changes will be in effect from the 6th of April 2023.
The new Capital Gains Tax (CGT) measure aims to make the process fairer for those who are separating or divorcing and are in the process of distributing assets.
This article will provide detail about the CGT measure, the proposed changes, and its impact.
What is the Capital Gains Tax measure, in relation to separation and divorce?
This measure makes changes to the rules that apply to transfers of assets between separating spouses and civil partners. It gives the individuals up to three years to make no gain / no loss transfers of assets between themselves, when they cease to live together and unlimited time if the assets are in the process of a formal divorce agreement.
In addition, the measure introduces special rules which applies to individuals who have maintained a financial interest in their former family home, following a separation, and this applies when that home is eventually sold.
The objective of the measure is to make the CGT rules fairer for spouses and civil partners who are in the process of separating. It gives them more time to transfer assets between themselves without incurring a large CGT bill.
The proposed changes to Capital Gains Tax
A background to the proposed changes
The Office of Tax Simplification (OTS) highlighted in its second Capital Gains Tax report in 2021 that “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 financial agreement approved by a court or equivalent processes in Scotland.”
The government responded to this on the 30th of November 2021 and agreed that the ‘no gain no loss’ window on divorce and separation should be extended.
The proposal
The legislation will be introduced in the Spring Finance Bill 2023, which will provide the following:
- Separating spouses or civil partners to be given up to three years after the year they cease to live together in which to make no gain / no loss transfers.
- The no gain / no loss treatment to also be applied to assets that separating spouses or civil partners transfer between themselves during the formal divorce agreement.
- A spouse or civil partner who maintains an interest in the former matrimonial home to be given an option to claim private residence relief (PRR) when the property 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 the property is eventually sold, be able to apply for the same tax treatment to those proceeds when received that applied when they transferred their original interest in the property to their ex-spouse or civil partner.
What is the impact of these changes?
The latest measure will make it fairer for spouses who are going through divorce or separation and are in the process of distributing assets between themselves.
This measure is anticipated to create a positive impact on individuals, by extending the period of time available to give separating couples at least three years to make a no gain / no loss transfer between themselves for CGT purposes. It will especially benefit those who are involved with more complex proceedings, as it means that more time can be spent on the divorce proceedings and other considerations, rather than CGT.
In addition, the extension will help avoid further reduction of household income or existing accumulated household wealth through dry tax charges for those who meet the new time period. There will also be similar benefits for those who are transferring assets between themselves that are listed in a divorce or separation agreement.
Summary
As announced in July 2022, the government will be making changes to the rules that apply to the transfer of assets between spouses and civil partners who are in the process of separating. The anticipated impact of the CGT changes is meant to be positive, as it makes the separating / divorcing process fairer and provides additional time to make a no gain / no loss transfer. The changes will take effect for disposals made on or after the 6th of April 2023.
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