Anyone who has had to complete a Form E also knows the pain of divorce is not just on the marital breakdown but also the pain associated with separating your financial assets. In a double-punch, couples are then faced with the harsh reality that there may also be a large tax bill due for not separating or transferring the assets expeditiously.
The Government has published draft legislation which will introduce two important and welcome changes to the current capital gains tax (CGT) rules under which (a) the period for no gain/no loss transfers between separating and divorcing couples and (b) principal private residence (PPR) relief where one spouse or civil partner leaves the family home is to be extended.
What is No gain/no loss and PPR relief?
No gain/no loss treatment: Assets which are transferred between separating or divorcing couples on a no gain/no loss basis do not trigger a CGT charge on the transferor and the transferee is treated as inheriting the base cost of the assets transferred. This is beneficial for the transferor in cases where the assets which are to be transferred have increased in value since they were acquired.
Currently, no gain/no loss treatment only applies to transfers of assets between separating or divorcing spouses or civil partners during the tax year of separation, i.e. until 5 April in the year in which separation occurs. Transfers which are made thereafter are usually treated as made at market value, and this could trigger substantial CGT charges for the transferor, particularly if the assets transferred include residential property on which CGT at the rate of up to 28% is chargeable, with the transferor having to report the gain and pay the tax due within 60 days after the transfer.
PPR relief: Currently, where on a breakdown of a marriage or civil partnership one spouse or civil partner leaves the matrimonial home, the spouse or civil partner remaining in the home will be entitled to PPR relief during the entire period of separation provided that it is their only or main residence during the whole of that period. The departing spouse or civil partner is also entitled to claim PPR relief for such period provided that the departed spouse or civil partner transfers his interest in the property to the spouse or civil partner who has remained in the home and has not elected for another property to be their main residence for CGT purposes.
What is changing?
For no gain/no loss, the draft legislation will extend the period for transferring assets to each other at no gain/no loss to the earlier of (a) 5 April following the third anniversary of the date on which the couple ceases to live together, or (b) the date on which the couple divorce, the marriage or civil partnership is dissolved or annulled, or they separate pursuant to a separation order.
The good news continues with PPR relief; the draft legislation will extend PPR relief for the departing spouse or civil partner where the other spouse or civil partner remains in the property. In such a case the departing spouse or civil partner will be able to benefit from PPR relief where (a) they dispose of their interest in the home to someone other than the remaining spouse or civil partner, or (b) they transfer their share of the home to the remaining spouse or civil partner in exchange for receiving the proceeds on the eventual disposal of the home, so that the deferred proceeds will qualify for PPR relief.
When can I benefit from this change?
The draft legislation is intended to be included in the Finance Bill 2023 and is expected to apply to disposals made on or after 6 April 2023. Note that separation does not need to take place on or after 6 April 2023. Hence, couples who separated before 6 April 2022 (when the current tax year commenced) may wish to delay transferring assets until after 5 April 2023.
Separating from your husband, wife or civil partner is harrowing enough, and these proposed changes are extremely welcome; they mitigate tax charges on assets being transferred as part of an agreed or court-based resolution and will make a real difference to every client.
At Laytons ETL, our family law team benefits from experienced and specialist in-house tax lawyers to ensure that we are not just at the cutting edge of law, but you receive holistic tax advice on your private wealth.
