2023 Changes to Capital Gains Tax during Separation
28th September 2023
As of 6th April 2023, spouses and civil partners going through a separation process may now benefit from new Capital Gains Tax rules that allow more time to transfer assets without incurring potential tax liabilities.
This article breaks down the policy changes, a summary of the impacts and details of what the revisions could mean for you.
Historic Policy
Married couples or those in a civil partnership are permitted to transfer assets between themselves under the “no gain, no loss” rule, with any tax liabilities only incurring at the point of sale/disposal of assets. Should a partner choose never to dispose of these then no CGT would be triggered, instead eventually moving to IHT rules.
JARGON EXPLAINER
*The ‘no gain no loss’ rule dictates that the transfer of assets between a non-separated couple (either married or in civil partnership) do not incur any tax liabilities. Essentially – no financial “gains” or “losses” are counted for tax purposes until the asset is disposed of by the partner to whom it was transferred.
Conversely, when a couple is divorced or separated, any transfer of financial savings and tangible assets between partners after the point of separation has the potential to trigger Capital Gains Tax liabilities.
Couples are classed as having separated for the purpose of CGT when:
- They are officially separated under a court order.
- A formal deed of separation is in place.
- They have separated in such circumstances that the separation is likely permanent.
The transfer of assets between separated couples has historically been able to benefit from the “no gain, no loss” rule – BUT only up until the end of the tax year in which the separation took place. Any transfer of assets after this point would trigger CGT liabilities. In addition, any transfer of assets that happened after the year of separation but before decree absolute would have to be calculated for tax purposes at the market value on date of transfer. This would be regardless of whether any money was received for the asset. This could create tax charges with no money to pay for the tax due.
The unfortunate reality of this approach was that couples separating in March would find themselves with only a few weeks to manage their affairs without incurring potential CGT fees. In cases requiring court orders, spouses or civil partners were highly unlikely able to settle their assets in that time.
Policy Changes as of 6th April 2023
1. Three Immediate Tax Years Allowed Following Separation for Disposal of Assets
The main rule change is that assets no longer have to be transferred within the tax year of separation. Separating couples now have the three immediate following tax years after separation before any CGT liabilities are incurred. This gives much-needed breathing space to organise financial affairs during the separation period.
2. Unlimited time for disposal of assets in instance of formal divorce/court proceedings
The new rules also state that, if a disposal is in line with a court agreement during formal divorce proceedings, CGT is not payable until actual point of disposal, even if the transfer is after the 3-year period.
3. Spouse/Civil Partner with Interest in Marital Home able to claim Private Residence Relief (PRR) when sold
In the instance where a spouse has retained an interest in the marital home they will (subject to certain conditions) be able to treat the time not residing at the home as if it were their main residence until its disposal, at which point they will be able to claim Private Residence Relief (PRR).
4. Private Residence Relief still to Apply in Instances where Interest in Marital Home has been transferred to Spouse.
In this instance and when agreed, the partner will be able to receive a percentage of the sale when the property is disposed using the same tax treatment and PRR (even when received in the future) that would have applied at the time of them leaving the home
Impact of Changes to CGT during Separation
The revisions intend to make things fairer for civil partners and spouses and will particularly benefit couples involved in complex legal proceedings that may take more time on settlement decisions.
The new measures allow for couples engaged in a divorce settlement or separation process with shared assets more time to reach a formal agreement without having to be concerned for potential CGT liabilities.
If you need any support on CGT or tax matters during a separation, please contact one of the expert TTRB team today. The breakdown of a relationship can be a very stressful time for all concerned and we have a sympathetic approach and understanding that individual circumstances differ. Before taking any action regarding your marriage or civil partnership separation settlements you should consult your accountant or financial advisor.
All information correct at time of going to print/live and on the best knowledge and understanding of the author at the time. This article is for general information only and does not constitute financial advice or recommendations for individual circumstances. No responsibility is taken for any actions taken on the base of the information within this article.
