I was really pleased to read the news that the government intends to change capital gains tax rules for divorcing couples. The proposed changes, to be introduced in the Finance Bill 2022-23 are:-
1. Separating spouses or civil partners be given up to three years after the year they cease to live together in which to make no gain or no loss transfers (at the moment couples are only given the year of separation which is not enough time).
2. 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 (this is completely new).
3. A spouse or civil partner who retains an interest in the family home be given an option to claim Private Residence Relief (PRR) when it is sold (at the moment if one spouse has already moved out of the family home they may have to pay capital gains tax when it is sold).
4. Individuals who have transferred their interest in the family 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 (sometimes one person transfers the house to other on agreement that they will receive a share at a future date, for example, when children are older, but at the moment this might leave them with capital gains tax to pay in the future, which hardly seems fair when they are acting in the benefit of the children potentially to their detriment of not being able to buy a house of their own in the meantime which would not acquire capital gains tax).
This really is a big change for divorcing couples. At the moment they only have the tax year of separation to transfer assets free of capital gains tax, and it’s usually not realistic to reach an agreement regarding the division of all assets within the tax year of separation. This leaves couples making rushed decisions in relation to individual assets that are not necessarily in their interests.
It needs to be noted that the capital gains tax liability does not just disappear when an asset it transferred. Instead the liability transfers to the person receiving the asset, so if they sold or transferred the asset in the future to a third party they would have to pay the whole of the capital gains tax from when the asset was originally acquired by their spouse. That’s potentially not as bad as it seems, for example, they might not intend to sell the asset or they might intend to live in the house which could reduce the capital gains tax liability, or they could have more of the allowance available to them. There are many things to consider, so it’s always important to consult an accountant before making any decisions, and we work with accountants with our clients.
What is not clear is when the new changes will apply. For example, will it only apply to couples who separate from April 2023 (if that’s when it comes into force), or will it apply to formal divorce agreements that are dated after April 2023. This may impact the advice that we provide to our clients in the meantime in terms of when to separate and when to finalise financial arrangements.
separating spouses or civil partners 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 be given an option to claim Private Residence Relief when it is sold