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In 2021, the Office of Tax Simplification recommended the relaxation of Capital Gains Tax (CGT) rules on divorce/dissolution of a civil partnership. The government has now recognised the need for change and draft legislation has been included in the current Finance Bill making its way through parliament. The proposed new rules would affect disposals made on or after 6th April 2023 for spouses and civil partners who are separating and no longer living together.
Current CGT rules on divorce
Spouses/civil partners can transfer assets between themselves without any CGT liability. That is because the disposal is deemed to be on a nil gain/nil loss basis, ie the receiving spouse/civil partner is treated as having acquired the asset at the original base cost to the disposing spouse/civil partner.
However, this exemption only applies until the end of the tax year in which a couple separate, ie to the following 5th April. As a result, there is very little time for the couple to deal with the practical consequences of separation at what is typically a very emotional time. And the closer to 5th April their separation occurs, the greater the potential inequity.
Any transfer of assets made after the tax year of separation is deemed to be at full market value, often creating a taxable gain for the transferring spouse/civil partner, irrespective of whether they receive a financial gain. A party must declare and pay any CGT liability within 60 days of the transfer, although qualifying annual exemptions and reliefs apply.
Proposed new CGT rules on divorce
If the proposed changes are enacted, from 6th April 2023:
- Separating couples will have up to 3 tax years from the year in which they separate to transfer assets on a nil gain/nil loss basis. This period will end earlier if, before the end of 3 years, they divorce or their civil partnership is dissolved.
- The nil gain/nil loss treatment will be extendable indefinitely where the transfer forms part of a formal court order.
- A spouse/civil partner who retains an interest in the former matrimonial home will have an option to claim Principal Private Residence Relief when it is sold.
- An individual who has transferred their interest in the former matrimonial home to their ex-spouse/civil partner, but who is entitled to receive a percentage of the proceeds when the property is sold, will be able to apply the same tax treatment to those sale proceeds as applied when they transferred their original interest.
As the above demonstrates, tax considerations can be complex and prove costly when dealing with divorce finances. Taking early advice is therefore essential for both parties. Contact us on 01225 755656.