The government has recently published draft legislation and an accompanying policy paper, Capital Gains Tax: Separation and Divorce, proposing changes to the rules relating to the transfer of assets between separating spouses and civil partners.
The draft legislation will form part of the Finance Bill 2022-2023 and is due to be implemented with effect from 6/4/2023. The impact of the changes will be significant for divorcing couples, are positive and allow them more time to transfer assets between themselves without incurring capital gains tax (CGT) charges.
The present position
The timing of the transfer of an asset between spouses is important under the current law.
- (i) Where an asset is transferred during the tax year in which the couple separate
At present, for couples to transfer assets such as property, business interests and shares at ‘no gain/no loss’, the assets must be transferred during the tax year of separation, i.e. no later than 5 April. If this is achieved, no CGT is payable, and assets can be transferred between spouses and civil partners as if they remain living together.
- (ii) Where an asset is transferred after the tax year in which the couple separate
Once the tax year of separation has ended, the spouses lose the benefit of the no gain/no loss rule and transfers are treated as normal chargeable disposals for CGT purposes, i.e. on transfer, the asset is deemed to be ‘sold’ at market value. This may result in a significant CGT liability to be paid by the transferring party (subject to any exemptions, including Private Residence Relief). With CGT at 28% on property transfers, this can be a significant cost as part of the divorce and importantly changes the approach and an added complication when divorcing couples are negotiating a settlement.
For example, if a couple separated in September 2022, provided a transfer takes place no later than 5 April 2023, the transfer is made at no gain/no loss with no CGT charge. The window for opportunity to make a transfer at no gain/no loss, therefore, narrows the closer you are to the end of the tax year.
In a few cases, the 6 April deadline proves helpful as it can prompt the couple to resolve their financial affairs on divorce more speedily, but this rarely happens.
More often than not, the deadline is unworkable, and places added stress on the couple at an already turbulent time.
Changes to be introduced from 6 April 2023
The changes to the rules surrounding CGT will include:
- 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 or no loss transfers
- no gain or no loss will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal court order
- a spouse or civil partner who retains an interest in the former matrimonial home to be given an option to claim Private Residence Relief 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, to 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
What does this mean in practical terms?
The objective is to make the CGT rules fairer for spouses and civil partners who are in the process of separating. When the new rules are implemented, couples will have more time to transfer assets between themselves without incurring a charge to CGT. Where that transfer is pursuant to a court order, the couple will have unlimited time to transfer those assets. Extending the no gain/no loss window for separating couples will help to lessen some of the financial pressure on the parties at the point of divorce.
At Fair-Result we are active in negotiating equitable financial settlements for our clients. More recently, we have not heard of any lawyers bringing this new position to the attention of their clients. In one instance, by planning the transfer of the asset to the spouse effectively, we have secured a saving for our client that significantly exceeds our fees for the whole of the divorce. Just one further example of where Fair-Result are leading from the front and why we were awarded recently the best divorce and financial settlement company in the UK for 2022