Should spouses or civil partners decide to get a divorce, Capital Gains Tax can be an important factor to consider to ensure an equitable outcome and to avoid any unexpected surprises in the future.
Recently (21st July 2022), the Government published draft legislation in respect of Capital Gains Tax for separating couples which, if approved, is intended to provide them with more time to transfer assets, such as property, shares, or business interests, between themselves, without incurring Capital Gains Tax charges from 6th April 2023.
What are the current Capital Gains Tax rules?
Currently, spouses and civil partners have until the end of the tax year, in which they separate, to transfer assets between them without incurring a charge to Capital Gains Tax. This is known as “no gain no loss”. Therefore, if the assets can be transferred before 5th April, no Capital Gains Tax is payable.
In the vast majority of cases, where negotiations take time or Court hearings need to be listed, for example, this timescale is simply unachievable. Once the tax year of separation ends, the couple, therefore, loses the advantage of the no gain no loss rule, and transfers are considered standard chargeable disposals for Capital Gains Tax purposes. This can result in a significant tax liability to be paid by the transferring party.
Experts have commented that the current Capital Gains Tax rules place an “artificial pressure” on couples who are parting near the end of the tax year, causing additional strain at an already stressful time.
What changes are being proposed?
The key changes expected, which are intended to form part of the Finance Bill 2022-23, are:
- “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
- 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
- a spouse or civil partner who retains an interest in the former matrimonial home 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, 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”
What impact will these Capital Gains Tax changes have on those going through a divorce?
The proposed changes, which reflect recommendations made by the Office of Tax Simplification (OTS), should have a hugely positive impact on separating couples as the process is made fairer in distributing assets between themselves. This means there will be less stress and pressure as there won’t be the added burden of couples rushing to get their financial affairs in order before the end of the tax year.
It will especially benefit separated couples who are involved in complex or acrimonious financial remedy proceedings, as they will not be punished if their litigation overruns. Given that it can take 18 months or more to be able to obtain a final order, the three-year period proposed is enormously helpful.
This area can be complicated depending on your circumstances, therefore if you’re separating, getting divorced, or dissolving your civil partnership, it is recommended that you seek legal advice when it comes to the distribution of your assets.
How can we help?
At Nelsons, our team of specialist family law solicitors in Derby, Leicester, and Nottingham is one of the largest in the East Midlands. Our experience ensures that we will give you expert advice about your circumstances, as well as support you throughout the divorce process.
If you need advice on any divorce or family law-related matter, please contact us and we will be happy to discuss your circumstances in more detail and give you more information about the services that our family law solicitors can provide along with details of our hourly rates and fixed fee services.
Please contact a member of our team on 0800 024 1976 or via our online form.
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