The Government has announced a change to how divorcing couples are treated for capital gains tax purposes when transferring assets between themselves. The new rules took effect from 5 April 2023 and a bill to this effect is currently passing through parliament.
Currently, transfers between a husband and wife or civil partners are exempt from Capital Gains Tax (CGT). This exemption extends to the end of the tax year in which the couple separate. This can lead to unfair results – compare the difference between a couple separating on 1 May who have 11 months to sort out their affairs; and a couple separating on 1 March who have one month.
Family homes are to a certain extent covered by the private principle residence (PPR) exemption, but the percentage of PPR exemption applied diminishes after someone has moved out so that where a sale is delayed CGT can become payable.
The Office of Tax Simplification has recommended that the government should extend the “no gain/no loss” window on separation. The Government has gone further than the recommendation to give a fairer outcome for those involved in complex separation and divorce proceedings.
Please be aware that cohabiting couples transferring assets between themselves are not exempt from paying CGT (although they can claim PPR exemption for their main home).
The new CGT rules
For illustration, let us assume that Mr and Mrs Jones are divorcing. They wish to transfer jointly owned investment properties between them. They separated in January 2023. To avoid paying CGT they must transfer the properties by the first to happen of either:
(i) the end of the third tax year after which they ceased to live together i.e. by 4 April 2026 or
(ii) the date of their final divorce order or separation order.
Therefore, the timing of applying for the Final Divorce Order (previously known as Decree Absolute) or the timing of the Deed of Separation needs to be carefully considered. It can be delayed where necessary.
Assets transferred in accordance with a financial court order receive the same no gain/no loss treatment.
If Mr Jones moves out of the family home and there is a significant delay in selling it, then he will now be covered by the no gain/no loss treatment referred to above. He can also choose to treat the period that he was no longer residing in the home as if it had been his only or main residence until the time of disposal so claim PPR exemption, subject to certain conditions.
Let us now suppose that Mr Jones has agreed to delay realising his interest in the family home for some years but that he is entitled under an agreement or order to receive a share of the profit when it is eventually disposed of. The new rules allow him to obtain PPR relief in the same proportion that relief applied to the original disposal to Mrs Jones or, where the original disposal qualified for no gain/no loss treatment, in the same proportion that PPR would have applied but for the no gain/no loss treatment.
What this means in practice
When the new rules are made law, payment of capital gains tax on the transfer of assets between spouses or civil partners should become a thing of the past as long as careful consideration is given to the timing of obtaining a financial court order on divorce or a final divorce order. It remains essential to obtain legal and accountancy advice to ensure that tax is not unnecessarily paid. Similarly, if planned right, CGT payable in relation to a transfer, sale or delayed sale of the family home should be a thing of the past.
It is important to bear in mind that payment of CGT is not avoided altogether, but merely deferred and the spouse receiving the benefit of the asset will need to pay CGT on the whole gain when he or she eventually goes on to sell that asset.
If you would like advice and support regarding your divorce and your liability for CGT, contact the specialist team of Family Lawyers at Neves Solicitors. Call 0330 0945 500 or email firstname.lastname@example.org to arrange an appointment.