How changes to Capital Gains Tax will impact couples going through divorce
Changes to the rules around Capital Gains Tax in relation to separation, divorce and dissolution of civil partnerships are being proposed in the Finance Bill 2022 – 2023. The changes reflect an extension of the current rules, giving former couples more time and flexibility to transfer assets without incurring Capital Gains Tax liability.
Here we look at the current rules, considering what will alter and the impact on couples going through divorce or dissolution.
What are the changes to Capital Gains Tax in divorce?
In an effort to simplify technical and administrative tax processes, the Office of Tax Simplification (OTS) has called on the government to extend the ‘no gain no loss’ window for separating spouses and civil partners who no longer live together and who have or plan to transfer assets as part of the separation or divorce.
In practice, this ‘no gain no loss’ provision allows the parties to treat assets being transferred as having neither increased nor decreased in value. This means that there is no capital gains tax liability on the transfer even if the asset has increased significantly in value in the intervening period.
As laid out in the Government policy paper ‘Capital Gains Tax: separation and divorce’,
legislation is proposed to provide that: ‘separating spouses or civil partners be given up to three years after the year they cease to live together in which to make no gain or no loss transfers.’ Changes have also been proposed to the rules that apply to the disposal of the former home of a spouse or civil partner who has ceased to live there.
What are the current rules around Capital Gains Tax on separation?
At the moment former couples can already benefit from a no gain no loss window providing exemptions from Capital Gains Tax liabilities. However, this is only applicable to transfers made in the tax year in which they separate. Once the household separates, the window closes on transfers in subsequent tax years.
The current provisions can be significantly detrimental to parties who, for example, have a long separation before starting to consider a more formal and longer-term separation and transfer of assets. In addition, the current provisions are disproportionately adverse to individuals with significant wealth and / or those who own assets with fluctuating values (such as stocks and shares). Further, given that it often takes several months to resolve the parties’ financial affairs following a separation or divorce, the opportunity is often missed under the current arrangements.
As a result of the proposed update, couples going through divorce or dissolution will be given up to three tax years from the date they cease to live together in which to make no gain or no loss transfers of assets between themselves. The period is unlimited if the assets are the subject of a formal divorce agreement.
Founding partner of Ribet Myles, Julian Ribet commented:
“Divorce and separation can be extremely stressful with individuals facing a wide range of often complex issues that they have to negotiate, pressure on families and often strained communication between the parties. Finances can form just one element of many different strands to a negotiation on separation. Expecting people to agree and transfer their assets before the end of the tax year in which a couple separates is often unrealistic, an added pressure and frequently simply unfeasible in complex separations where multiple issues are often at play.
We believe that separation is about getting the right outcome, not a rushed one. The new rules are a sensible reflection on the realities of the separation and divorce process and a welcome change.”
When will the new rules around Capital Gains Tax in divorce come into place?
These changes apply to disposals that will occur on or after 6 April 2023. For couples currently going through separation, the no loss no gain window will be available for up to three years on disposals made after 6 April 2023.
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