In the Spring Budget, the UK Government has confirmed changes to the law on Capital Gains Tax for divorcing couples.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is the tax payable by a person when they dispose of an asset that they own. The tax is charged on the gain or profit that is made. The person must usually report their gainful disposal to HMRC and pay the tax within 60 days. HMRC do not calculate the tax payable, this is the responsibility of the individual.
A ‘disposal’ usually involves the sale, transfer, or exchange of an asset.
A person will only pay CGT on their gains made over and above the annual tax-free allowance. The tax-free allowance is currently £12,300 and £6,150 for trusts. A person may be able to reduce a tax bill by deducting losses or claiming reliefs.
The rate of tax payable will depend on your earnings. If you are a higher or additional rate taxpayer, you will pay 28% on gains from residential property and 20% on gains from other assets. If you are a basic rate taxpayer, it is a little more complicated. The rate of tax will depend on the size of the gain, your taxable income, and whether or not the gain is from disposal of residential property.
Assets that are subject to CGT include:
- Most personal possessions worth £6000 or more, aside from your car;
- Property that is not your main home;
- Your main home if let, used for business, or it is very large;
- Most shareholdings;
- Business assets.
The Present Law on Divorce and Capital Gains Tax
Under the present tax regime, separated spouses and civil partners are able to transfer assets between themselves without incurring CGT until the end of the tax year in which they permanently separated. This is called the ‘no gain no loss’ window. After that, any transfer of assets between the couple may be subject to CGT. The gain on which the tax is levied is calculated on the market value of the asset at the date of the disposal even if no money or other proceeds are received in return.
Separated couples usually make a disposal when settling their financial affairs. Quite often the family home is jointly owned and the spouse who left the home will sign the property over to the spouse who remains living in it. That spouse will be deemed to have disposed of that property. In some cases, an investment property is sold or a shareholding is transferred to say, a wife by the husband, in order for that husband to retain another asset such as a pension. The husband would be deemed to have made a disposal in consideration for keeping other assets. CGT may then be payable.
Changes to the Law
As part of the Finance Bill 2022-2023, HMRC published draft legislation with proposed changes to the tax regime on the transfer of assets between spouses and civil partners who are separated and no longer living together. In the Spring Budget 2023, the UK Government announced that these changes will take effect and become law on 6th April 2023.
The confirmed changes to CGT are:
- Spouses and civil partners will have up to three years after the tax year in which they permanently stop living together to transfer assets between themselves with no CGT liability;
- This will also apply to assets that spouses and civil partners transfer between themselves as part of a formal divorce agreement;
- A spouse or civil partner who retains an interest in the matrimonial home but has stopped living in the property will be able to claim Private Residence Relief from CGT if the property is ultimately sold;
- A spouse or civil partner who has transferred their interest in the matrimonial home to their spouse or civil partner and are entitled to receive a percentage of the proceeds when that property is eventually sold, whether or not in the form of a deferred charge, will be able to apply the same tax treatment to those sale proceeds that applied when they transferred their original interest in the home.
Effect of these Changes
When these changes become law from 6th April 2023, a couple permanently separating during the tax year beginning April 2023 will be able to transfer assets between themselves without incurring CGT until April 2027.
These changes should in theory create some additional benefits:
- More time for couples to consider the tax implications of their divorce;
- Removal of the disadvantage suffered by the spouse or civil partner who left the matrimonial home and can no longer avail of Private Residence Relief upon their subsequent disposal of the property;
- Less frequent instances of CGT being incurred in property transfers between spouses where there is no cash proceeds available to pay the tax liability;
- Establishing the applicability of holdover relief may become less critical.
It is important to note that these changes only apply to separated couples who are married or in a civil partnership. The rules do apply to unmarried couples who have been cohabiting. This may yet be subject to challenge.
The changes emphasise the need for separated couples to formalise their matrimonial finances either by securing a Court Order or by entering into a Matrimonial Agreement and having the Agreement presented to a Court to be made a Court Order. This is something which can be overlooked when court proceedings have not been issued or when a Decree Nisi has been granted at an early stage.
In summary, these changes to the Divorce and Capital Gains Tax rules are to be welcomed. Separated couples (and their advisors) will be afforded more time to consider how the family unit can preserve their assets without incurring tax.
For further information on our Family & Matrimonial services, visit our webpage.
This article has been produced for general information purposes and further advice should be sought from a professional advisor.
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