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New CGT deadlines to reduce stress for separating couples

Spouses or civil partners in the process of separating can find themselves faced with an expensive Capital Gains Tax (CGT) bill. This puts a lot of pressure on divorcing couples during an already difficult time, as they must meet tight deadlines for transferring assets.

To make things a bit easier for couples during their divorce settlements, the government is proposing that ex-spouses and ex-civil partners should be given up to 3 years to make ‘no gain, no loss’ asset transfers between themselves after they no longer live together.

The proposed changes could also see the introduction of special rules regarding formal divorce agreement asset transfers and Private Residence Relief (PRR). Here’s what you need to know about the current rules, and the changes that should take effect from 6th April 2023.

Previous CGT rules for divorce

According to the current legislation (Section 58 of the Taxation of Chargeable Gains Act 1992):

  • Transfers must be made on a ‘no gain, no loss’ basis by the end of the tax year in which the partners cease living together (the ‘year of separation’) to avoid CGT.
  • After the end of the ‘year of separation’, any transfers made before the finalisation of the divorce will be treated as market value, meaning CGT is likely payable.

This means that while the separating couple are still living together, any transfers of assets between them can be made on a ‘no gain, no loss’ basis – treating the acquisition by the receiving partner as the same value as it originally cost the partner transferring it.

Once the couple have stopped living together, this treatment will only apply for the remainder of the tax year. After this point, any transfers will be treated as regular disposals for CGT purposes.

This can cause a lot of stress for the partner disposing of the asset, especially if it’s close to the end of the current tax year when the couple stops living together.

Proposed changes to CGT deadlines

In its second Capital Gains Tax report, the Office of Tax Simplification (OTS) looked into the ways that CGT rules
apply to divorcing individuals, and made recommendations for deadline extensions.

The government responded to their suggestions in November 2021, agreeing that the ‘no loss, no gain’ asset transfer window should be extended for disposals occurring on or after 6th April 2023.

To put this into action, the Finance Bill 2022-23
should introduce legislation that will allow:

  • Separating spouses/civil partners to make ‘no gain, no loss’ asset transfers for up to 3 years after the tax year in which they stop living together.
  • The same ‘no gain, no loss’ treatment to apply to asset transfers between divorcing spouses/civil partners as part of formal divorce agreements, with no time limit.

It should also introduce special rules for separated individuals who leave the couple’s residence but maintain a financial interest in their former family home, who will have the option to claim Private Residence Relief (PRR) if the property is later sold on to a third party.

Similarly, individuals who transferred their financial interests in the former matrimonial home to their ex-partner will be entitled to a percentage of the proceeds of an eventual sale. They would therefore be eligible to apply the same tax treatment to those proceeds that would have applied before they transferred their interests to their ex-spouse.

Getting help with CGT during a divorce

These measures are expected to have a positive impact on households and families where a couple seeks to legally end a marriage or civil partnership. Extending the time period for transferring assets reduces the CGT
burden on individuals transferring matrimonial assets, allowing separating couples to focus on other considerations, including adjusting to a healthy post-separation family lifestyle.

However, you should bear in mind that even if your separation takes place after 6th April 2023, if you finalise it under a divorce order earlier than the extended deadline window, this will bring the ‘no gain, no loss’ period to an automatic end. For more details about these proposals and how they could affect you, click to read through the ‘Capital Gains Tax: separation and divorce’ policy paper.

You can also read our previous blog on the tax implications of no-fault divorce under the Divorce, Dissolution and Separation Act (2020) for information on new divorce laws. If you or your family find yourselves in need of professional tax advice, feel free to contact GBAC, accountants in Barnsley, for a consultation.