Current tax legislation provides that transfers of assets between separating spouses or civil partners who are living together are made on a “no gain or no loss” basis in any tax year in which they are living together. This means that when spouses or civil partners separate, no gain or no loss treatment is only available in relation to any disposals in the remainder of the tax year in which the separation happens. After that, transfers are treated as normal disposals for Capital Gains Tax purposes.
This has always been an issue in divorce cases given the window to resolve issues can be small, particularly where parties separate towards the end of the tax year or where the parties are involved in more complex Proceedings.
Recently, the Office of Tax Implication (OTS) in its second Capital Gains Tax Report, considered how the Capital Gains Tax Rules apply to individuals who separate in divorce, and recommended that the Government should extend their “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, and
- Any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a Court.
In response, the Government agreed that the “no gain or no loss” window on separation and divorce should be extended. Therefore, new legislation will be introduced in the Finance Bill 2022 / 23 that will provide the following:
- 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.
- Individuals that 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, will 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.
These measures will make the process fairer for spouses who are separating or divorcing and are in the process of distributing assets between them. It will give separating couples at least three years to make no gain or no loss transfers between themselves for Capital Gains Tax purposes. The extension will also avoid the depletion of existing accumulated household wealth and will often benefit the individual who is leaving the family home.
Once implemented, the above changes are proposed to apply to disposals that occur on or after 6th April 2023. This creates a significant tax planning opportunity for parties that are currently going through divorce or separation, and those individuals may wish to consider delaying or deferring any asset transfer that would or might otherwise result in a Capital Gains Tax liability.
For more information on the changes click here: Capital Gains Tax: separation and divorce – GOV.UK (www.gov.uk)
This article has been written by Emma Alfieri, Legal Director in our Family Team. Emma is not a Tax Specialist, and therefore this article should not be taken as tax advice. It is recommended that parties concerned take their own tax advice in conjunction with their own legal advice.
For further information and legal advice on all aspects of Family law please contact Emma Alfieri on 01284 717459 or firstname.lastname@example.org