The government has released draft legislation which will change the capital gains tax position for divorcing couples. At the moment the legislation is in draft form and the proposed implementation date is 6 April 2023.

Current law

The current law states that married couples have until the end of the tax year in which they separate to transfer assets between themselves at ‘no gain no loss’ meaning that there would be no immediate tax payable on transfer and each party takes over ownership of the asset at the original base cost. Once the tax year is over any transfers taking place between the couple are done at market value.

Changes

The proposed changes are:

• Extending the ‘no gain no loss’ window to 3 years from the point of separation or for any period provided the assets are transferred pursuant to a court order.
• Allowing non-occupying spouses of the family home to benefit from PPR relief on sale: At the moment when one party moves out of the family home, if they are out for more than 9 months they will face a CGT charge when they sell or transfer the property. These new rules allow for that individual to claim PPR on the sale even for the periods that they have been absent from the home providing that the sale and absence is due to divorce.
• Providing additional relief for individuals who enter into a deferred charge arrangement over the main home: At the moment when a party enters into a deferred charge over the main home the charge is a new asset for CGT and when the charge is paid the increase in value is subject to CGT. The new rules allow that party to claim PPR relief on that gain and thereby reduce the liability to nil.

These changes are welcome. They will enable many couples who are going through divorce to transfer their assets between each other without incurring an immediate capital gains tax liability. The changes with regards to the family home will also enable those who have left the home to be able to benefit from PPR relief on sale. The current rules penalise those that have left the property as they can no longer benefit from full main home (PPR) relief. It means couples can take the time they need to agree and resolve their financial affairs on divorce, rather than feeling rushed due to tax implications.

Under the proposed legislation, couples separating in tax year 2023-24 will have until 5 April 2027 to transfer assets between themselves without incurring any immediate tax liability. What is less clear is what the position will be for couples who separate before April 2023. Further clarification is awaited, but if you and your partner are considering separation it would be worth raising this issue with your tax advisor so you can be fully informed about the proposed changes and how they may impact the timings of your next steps.

Author Name: Editor

Published content by The Divorce Surgery Editorial Team.

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