Divorcing or separating couples need to be aware of the latest changes to the capital gains tax (CGT) rules when it comes to transferring properties between them. In this blog post, we will discuss the recent updates and what they mean for individuals going through a divorce or separation. Under the previous rules, no CGT was charged on asset transfers between spouses or civil partners living together. However, this tax relief did not apply if the couple divorced or separated. To address this issue, the Government introduced changes as part of the Spring Budget delivered on 15th March 2023.
New Divorce and Separation Rules in Finance Bill 2023 to Enhance Fairness and Practicality
The Finance Bill 2023 will include legislation that extends the period of time separating and divorcing couples have to benefit from CGT relief on asset transfers. This change aims to improve fairness and introduce a more practical system for individuals going through a divorce or separation.
The previous rules differed depending on whether spouses or civil partners were still living together or had already separated:
Living Together: When spouses or civil partners lived together, any asset transfers between them were made on a “no gain, no loss” basis. This means that any gains or losses from the transfer were deferred until the receiving spouse disposed of the asset. The receiving spouse was treated as having obtained the asset at the original cost.
Separated or Divorced: Once spouses or civil partners separated, the “no gain, no loss” treatment was only available for the remainder of the tax year when the separation occurred. After this period, transfers were treated as normal disposals for CGT purposes.
This posed practical challenges for couples separating later in the tax year, as they had limited time to arrange their affairs without incurring potential CGT liabilities. This became even more challenging when multiple assets were involved, or when spouses were awaiting court orders.
New Rules
The rules for spouses and civil partners living together remain the same. However, the Government has extended the “no gain, no loss” treatment for transfers of assets between separating spouses or civil partners:
1. For up to three years after the year in which the couple cease to live together as spouses or civil partners.
2. For an unlimited period when the transfer occurs as part of a formal divorce agreement.
This change provides a more sensible approach, allowing separating couples more time to reach a formal divorce settlement without having to worry about CGT liabilities for the transferring individual.
Impact on the Matrimonial Home
When spouses or civil partners separate and sell their matrimonial home, there can be CGT consequences. Normally, spouses or civil partners selling their matrimonial home would benefit from Principal Private Residence relief (PPR) to mitigate any CGT liability, provided they occupied it as their primary home during their ownership period.
However, when couples separate, one party usually has to move out of the matrimonial home. This misalignment between “occupation” (for PPR) and “ownership” periods can expose the leaving spouse to potential CGT liabilities when the home is eventually sold.
To address this issue, from 6th April 2023, the leaving spouse is allowed to elect how their PPR is appointed between their former matrimonial home and any other home they might have acquired since leaving the matrimonial home. This flexibility provides options for individuals who retain an interest in the matrimonial home or receive a percentage of the proceeds upon its sale.
Given these recent changes to the rules on capital gains tax, it is advisable for separating couples to seek professional advice regarding their potential CGT exposure and the best strategies for managing their tax liabilities when transferring matrimonial assets.
Calculating CGT liabilities during separation can be complex and time-consuming, particularly when dealing with multiple properties, overseas assets, or other capital gains tax relief. Seeking early advice can streamline the process and potentially result in a more favourable financial settlement for both parties.
Our expert accountants are well-versed in the latest CGT rules and can provide guidance tailored to your specific situation. With our assistance, you can navigate the new capital gains tax landscape with confidence and ensure a smooth transition during this challenging time.
If you need help navigating the new capital gains rules for divorcing and separating couples, we are happy to talk you through what you need to do to stay on top of your finances. Feel free to get in touch,
You can call us on 01257 241 111
Or email us at info@studholme-bell.com
Disclaimer: This blog post is intended for informational purposes only and should not be considered as legal or financial advice. Please consult with a professional accountant or tax advisor for personalised guidance.
