Changes to Capital Gains Tax on divorce: transfers of assets between spouses and civil partners in the process of separating

HMRC have published draft legislation to change the rules that apply to disposals and transfers of assets between spouses and civil partners who are in the process of separating.

Primarily, the new legislation which will be introduced in the Finance bill 2022/2023 provides that from 6 April 2023 parties be given:

  • Up to three full tax years, after they cease living together, to transfer assets between one and another for neither a gain, nor a loss (this means receiving party acquires the asset at the same cost incurred by the giving party).

Under the existing rules, where parties separate, the ‘no gain no loss’ treatment is currently only available in relation to disposals made in the remainder of the tax year in which they cease living together. After that, transfers are treated as normal disposals for CGT purposes. This can place pressure on couples who separate close to the end of the tax year.

It should be noted however, if couples divorce before the end of the three-year period, ‘no gain, no loss’ treatment will end at the date of the divorce – unless the transfer takes place as part of the divorce agreement (see below); and

  • an unlimited time to transfer assets with ‘no gain, no loss’ treatment when the transfer is part of a formal divorce agreement.

The draft legislation also includes changes to CGT calculations on the sale of the former marital home:

  • A spouse or civil partner who retains an interest in the former matrimonial home will have the option to claim Private Residence Relief when it is sold.

Under existing rules, if one party moves out of the marital home for more than 9 months, there may be CGT liability when they sell or transfer the family home as Private Residence Relief is not available after 9 months; and

  • 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, will 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.

Currently, where one party transfers their interest to the other and is to receive a percentage of the proceeds when the marital home is sold (this is known as a deferred charge), they must pay CGT on the increased value of the charge when the family home is sold.

The government anticipate that the new measures will have a positive impact on individuals by:

“extending the period of time available to give separating couples at least three years to make no gain or no loss transfers between themselves for capital gains tax purposes. This will especially benefit those parties involved in more complex proceedings, as it means that more time can be spent on the divorce considerations, rather than Capital Gains Tax considerations”

They also anticipate that the changes will help to avoid further depletion of household income or existing accumulated household wealth through dry tax charges for those who meet the new time.

Please note, the legislation referred to in this article is still only in draft and may not come in as planned from April 2023. The Government could change the rules or abandon them in their entirety.

The ICAEW’s Tax Faculty (leading authority and source of expertise on taxation) has requested confirmation that the new measures will be included in the 2023 Spring Finance Bill. All being well, the measure will be implemented in April this year.

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