Separating Spouses and Civil Partners to Benefit from Changes to Capital Gains Tax Rules

Earlier this year, we co-authored an article explaining the current Capital Gains Tax (CGT) rules for separating spouses and civil partners: Waiting for the new divorce laws – could there be tax consequences? Felicity Chapman, Tabitha Collett (charlesrussellspeechlys.com).

Presently, spouses and civil partners can transfer assets between them on a no gain/no loss basis in a tax year in which they are living together. This means that there is no immediate CGT charge - any gains are effectively passed on to the spouse receiving the asset and CGT only becomes payable when they eventually dispose of it. If a couple want to take advantage of this when they separate and are resolving their financial arrangements, the transfer must be made during the tax year in which they separate or they will trigger an immediate CGT liability on any gains (unless they benefit from other reliefs).

The general consensus has long been held that this window was not long enough. For spouses and civil partners who separate (or take advice) close to the end of a tax year, have complex financial circumstances or cannot swiftly agree how to divide their assets, this can place them under significant pressure to deal with matters very quickly and in some cases it is impossible to complete any transfers within this limited time period.

As we reported in our last article, in May 2021 the Office of Tax Simplification (OTS) published a report recommending that the government extend the “no gain/no loss” window and on 30 November 2021, the government confirmed that it accepted this recommendation.

A Policy Paper has now been published by the government confirming that they intend to make changes to the CGT laws for disposals from 6 April 2023. According to the Policy Paper, new legislation will include the following changes:

• "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 (PRR) when it is sold
• individuals who 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 new rules will also be of use where one of the couple is to retain an interest in the family home in the longer term but will not be living there.

The government do not expect the changes to have significant economic impact but they are likely to be of real benefit to separating couples, giving them greater options and the time and space they need to resolve their finances. The proposed changes are therefore likely to be widely welcomed by separating couples, lawyers, accountants and financial advisers alike.