As part of its Spring Budget, the government has formally announced changes to the capital gain tax for separating couples, which will come into effect on 6 April 2023. The changes were previously hinted at in a government update published in July 2022.
The previous rules allowed spouses to transfer assets between them on a ‘no gain no loss’ basis, but only during the tax year of their separation. Any gains or losses from the transfer would then be deferred until the asset is later disposed of by the receiving party. Transfers outside of the tax year of separation incurred Capital Gains Tax in the usual way as if the transaction were taking place between third parties at market rate.
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The rules were widely criticized, as separating spouses were given very little time to resolve the financial issues between them on a no gain no loss basis.
The new rules will provide separating spouses with up to three years after the year they cease to live together to benefit from the no gain no loss tax treatment. Further, provided that the transfer forms part of a ‘formal divorce agreement’, there is no time limit. It is assumed that ‘formal divorce agreement’ will include a Consent Order or other Court Order effecting the transfer, but this is yet to be clarified in the legislation.
Individuals who have maintained a financial interest in their former family home following separation will also benefit from the proposed changes when that home is eventually sold.
- Anyone who has retained an interest in the former matrimonial home will be given an option to claim private residence relief (PRR) when it is sold.
- Further, anyone who has transferred their interest in the former property to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold can then apply the same tax treatment to the proceeds when received, as that which applied when the transfer to their ex-spouse or civil partner took place.
These welcome changes will come as a relief to many separating couples, who would, under the old rules, have faced significant immediate tax charges upon the transfer of assets between them. The removal of the artificial time pressure imposed by the previous “tax year of separation” rule will allow more time to be spent on the complexities of the division of assets between spouses, rather than focusing on Capital Gains Tax considerations.