A policy paper published following the Spring Budget has confirmed much-anticipated changes to Capital Gains Tax rules, which affect separating couples. Previously, spouses and civil partners could transfer assets between them on a no gain/no loss basis in a tax year in which they are living together. This means that there is no immediate CGT charge – any gains are effectively passed on to the spouse receiving the asset and CGT only becomes payable when they eventually dispose of it. If a couple wanted to take advantage of this when they were separating and resolving their financial arrangements, the transfer must have been made during the tax year in which they separated or they would trigger an immediate CGT liability on any gains (unless they benefited from other reliefs).
The general consensus was long-held that this window was not long enough. For spouses and civil partners who separated (or took advice) close to the end of a tax year, have complex financial circumstances or could not swiftly agree how to divide their assets, this could place them under significant pressure to deal with matters very quickly at an already stressful time, In some cases it was impossible to complete any transfers within this limited time period, resulting in a CGT bill when they may already be concerned about their future financial security and are dividing their joint resources to form two separate households.
In 2021 the Office of Tax Simplification (OTS) published a report recommending that the government extend the “no gain/no loss” window and the government confirmed later that year that it accepted this recommendation.
A Policy Paper was published by the government last year confirming that they intended to make changes to the CGT laws. They have now confirmed that this will be included in the Spring Finance Bill, to be published on 23 March 2023, and will come into force for disposals from 6 April 2023. The new legislation includes the following changes:
- separating spouses or civil partners will be given up to three years after the year they cease to live together in which to make no gain or no loss transfers;
- no gain or no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement – without time restrictions;
- a spouse or civil partner who retains an interest in the former matrimonial home will be given an option to claim Private Residence Relief (PRR) when it is sold;
- 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
These new rules will therefore also be of use where one of the couple is to retain an interest in the family home in the longer term but will not be living there.
The government had indicated previously that they did not expect the changes to have significant wider economic impact – they are now projected to cost around £10 million per year from 2024 – but they acknowledge that they will make the process for separating spouses/civil partners fairer. These changes are likely to be of real benefit to separating couples, giving them greater options and the time and space they need to resolve their finances. These changes will be widely welcomed by separating couples, lawyers, accountants and financial advisers alike.
Felicity Chapman
Senior Associate, Charles Russell Speechlys
