The government recently announced plans to give separating couples a longer period in which to consider and transfer their assets and avoid Capital Gains Tax, as currently, depending when the planned separation takes place, time may be very limited and impractical. This is known as ‘no gain or no loss’ transfers.

How does spouse CGT transfers workFrom April 6th 2023, separating spouses or civil partners, will be allowed up to three years to make any agreed split in assets transferred between each other, after they have split up.

NOTE: These plans are currently only draft legislation, so given how fluid government seems these days, this may or may not happen.

Separating from a spouse or civil partner is one of those events where those involved often fail to consider the immediate tax implications of the event. The overarching financial implication for those involved, i.e. who gets what and in what proportions, can be all consuming. If they are fortunate, their lawyers may suggest that they obtain independent financial advice and tax guidance, which may help them realise that simply dividing assets may not be that simple.

The current CGT position for separating couples

A normal part of being married or in a civil partnership is that you are allowed to transfer assets to one another without consequences and without incurring Capital Gains Tax. This can be cash, investments or any other asset, such as the family home or even rental property. The main consequence is that the transferee becomes responsible for any tax liabilities upon disposal of the asset. For example, if a rental property owned by one partner is transferred legally to the other and they decide to sell at some point in the future, the receiving partner will be required to make the declaration to HMRC.

The cost basis for the transfer while married or in a civil partnership is that of the original purchase, including fees. So if a home was purchased for £200,000 20 years ago and is now worth £500,000, it makes no difference, the transfer is based on the original £200,000. However, if the recipient of the transfer then decides to sell at some point in the future, the actual capital gain is realised (£300,000) and CGT becomes due.

How does the sale of the matrimonial home impacted by CGT?

Sometimes in divorce or separation cases, the family home may remain jointly owned, while the other partner moves out. This might be the case where children are involved and rather than upset their lives further, one parent stays in the family home.

If the family home is sold at a later date, the partner who remained in the home and treated it as their main residence will not be liable for CGT. However, if the sale was made more than nine months after they moved out, the partner who did leave will likely face a CGT bill for the proceeds of the sale of their portion of the home. If it was before the nine months, they will be exempt.

There is still relief available to the leaving spouse after nine months though. This is when the spouse transfers their share of the jointly owned property to the other, prior to the property being sold. However, there are conditions, these are:

The property continues to be the other spouse’s main residence.
A Consent Order governs the transfer and a claim is made within two years to HMRC.
The spouse who left does not yet have a new principle residence.

Meeting these conditions will allow the leaving spouse to enjoy relief from CGT for the period of moving out to the point of the asset transfer.

Be mindful of the tax year end date – April 5th

Under current legislation, it’s very important to keep in mind the end of the tax year, i.e. April 5th. Separating couples can continue to transfer assets under a ‘no gain no loss’ basis up to the end of the tax year of separation. After that, the transfer is considered in the same way as if it were a straight property sale and capital gains tax is payable if it is applicable.

Not all separations are straight forward. It may take many months to negotiate and finalise details of an assets new ownership, and for the transfers to actually take place. As April 5th approaches, an unreasonable level of pressure may come to bear on the parties to resolve the issue quickly, possibly in a manner detrimental to one or both parties.

It is for this reason and others that the government has proposed the introduction of the new scheme; essentially to allow a reasonable period of time in which to settle the affairs for the separation and reduce the stress involved.

What are the new rules being proposed for April 6th 2023?

This is what the government have said:

  • 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, 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

What does this mean in practice?

Year end deadline is no longer a problem. There’s no pressure to complete transfers for separations in a tax year by the end of that tax year.

This applies equally to separating or divorcing for earlier years, so in this case 2019/20 and 202/21. Furthermore, if asset transfers are part of a formal divorce or court separation agreement, it may be possible for the ‘no gain no loss’ treatment to be applied for even earlier years.

Tax implications can be quite complex and require expert guidance

Many divorces or separations are relatively simple because not many assets are involved and may have a simple remedy and tax treatment. However, some divorcing or separating couples have quite complex assets involving not just a family home, but often rental properties, company ownership, income from stocks and shares, pensions, to name a few. In these circumstances, you’re best to proceed under the guidance of a professional tax advisor familiar with such circumstances.

At TaxAgility, we’ve assisted numerous individuals navigate the potential mine field divorce, separation and tax represents. Why not give us a call on 020 8108 0090 and find out how we can assist you.