As of 6 April 2023, new rules within the Finance Bill 2023 have relaxed the capital gains tax rules upon divorce, dissolution of civil partnership or formal separation.
What is Capital Gains Tax (CGT)?
A ‘capital gain’ is the profit realised when an individual, partnership or company disposes of a capital asset. Capital assets include almost every kind of property (i.e. land, buildings, antiques and shares within a company).
A taxable ‘disposition’ (or ‘disposal’) includes the sale or gift of an asset, trading one asset for another, and even the destruction of an asset where insurance proceeds are made available.
The ‘profit’, which is what is taxed for CGT purposes, is the difference between the sale price of the asset (or the ‘fair market value’) when the asset is disposed of, and the cost of having acquired the particular asset (inclusive of any costs in improving the value of the asset).
Remember: Exempted Disposals, where no CGT is incurred, includes transfers between spouses. The recipient spouse is deemed to have acquired the asset at the same cost as the ‘donor’ spouse.
CGT Rules prior to 6 April 2023
Unlike other taxes, CGT could remain payable on transfers between spouses and civil partners prior to a decree absolute (Final Order). This was because the relevant date for CGT in the context of divorce was the date of separation. Therefore, any transfers which may have taken place between spouses or civil partners in the tax year of separation were considered to be on a ‘no gain’ or ‘no loss’ basis. However, after this event, charges could be incurred where there were increases in value of the matrimonial or civil partnership asset/s.
Remember: The tax year for individuals runs from 6 April to 5 April of the following calendar year (i.e. 6 April 2023 to 5 April 2024)
Therefore, the issue with the previous rules was that parties who separated later on in a tax year could be disproportionately affected. So, if a couple were to separate on the 20th of April, they would have until the following 5th April of the next calendar year to complete any transfers without incurring a CGT charge. However, if a couple separated on the 29th of March, they would only have one week in which to transfer any assets between themselves. This undoubtedly increased the pressure on separating couples right at the early stages of their respective separation.
CGT Rules after 6 April 2023
The main changes to the rules are now as follows:
- Separating couples are now to be given three years, following the tax year of separation, in which to make any transfers on a ‘no gain’ or ‘no loss’ basis. This would therefore apply to couples who separate but do not divorce with a final financial order. This is a significant change to the old rules where the requirement was that couples had to complete transfers within the same tax year.
- The ‘no gain’ or ‘no loss’ treatment is unlimited in time if the assets are transferred in accordance with an agreement or order as defined in s225B(2)(a) or s225B(2)(b) of the Taxation of the Chargeable Gains Act 1992 (i.e. a formal divorce agreement). Therefore, if a couple has a financial agreement or order in connection with their divorce, which provides for the transfer of an asset from one of the parties to the other, this can be done at a ‘no gain’ or ‘no loss’ irrespective of how long the couple have since separated (i.e. more than a year).
- A spouse who retains an interest in the former matrimonial home (FMH) can now be given the option to claim Principle Private Residence Relief (PPR) when the asset is sold to a third party. Previously, a spouse could only claim this if their interest was transferred to the spouse in occupation of the FMH).
- Where one of the parties transfers an interest in the FMH to the other, and, under arrangements made in connection with a divorce or separation, receives a sum on disposal of the property at a later date (i.e., when the children reach the age of 18), the receipt date is treated at that date as if it had arisen under the original disposal (i.e., if the transferor has a claim for PPR on the original disposal).
The new rules are therefore welcomed by family law practitioners and removes many of the problems and inequalities previously faced under the old regime.
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