The New CGT Rules for Separating Couples
At present, no capital gains tax (CGT) is charged on a transfer of assets between a married couple or civil partners who live together. However, if the couple separate or divorce, this tax relief does not necessarily apply.
The Office of Tax Simplification reviewed the rules relating to separating couples in 2021 and proposed a number of recommendations which the Government accepted. In a policy paper in July 2022, the government outlined their proposed revisions to the current law (contained in the Finance Bill 2022-23) and indicated that, once implemented, it would be operative from 6 April 2023, however, these provisions do not seem to have progressed through Parliament and the timing of implementation is yet to be confirmed. The intention behind the new rules is to enable a couple to separate and divorce without undue pressure to reach a financial agreement due to CGT consequences. It is expected to be of particular benefit to those involved in more complex financial proceedings, as it means more time can be spent on divorce considerations, rather than CGT considerations.
Transfers of assets between former spouses or civil partners are made on a ‘no gain or no loss’ basis provided these transfers occur in the tax year in which they have separated - for example, if a couple separated in November 2022, they could only transfer assets between them free of CGT up to 5 April 2023.
This means any gains or losses from the transfer are deferred until the asset is disposed of by the receiving spouse. The receiving spouse will be treated as having acquired the asset at the original cost paid when the transferring spouse purchased the asset.
If the transfer occurs after the tax year in which the spouses separated then it is treated as a normal disposal and will be subject to Capital Gains Tax in the normal way.
The proposed changes provide for a longer period of the ‘no gain, no loss’ rule for up to three years after the tax year in which spouses cease to live together. The ‘no gain, no loss’ rule will also now apply to assets that are transferred between spouses as part of a formal divorce agreement without time restrictions.
In addition, two further reliefs will be permitted in relation to the former matrimonial home (FMH).
- A spouse who retains an interest in the FMH will be given an option to claim Private Residence Relief (PRR) when it is sold.
- A spouse who has transferred their interest in the FMH to the other spouse, but remains entitled to receive a percentage of the proceeds when that home is sold (known by family lawyers as a Mesher Order), will be able to apply the same tax treatment to those proceeds that applied when the interest was transferred.