The government has been reviewing tax arrangements currently in place which could positively benefit couples who are separating or divorcing.
S.58 of Taxation of Chargeable Gains Act 1992 deals with the current treatment of the transfer of assets between an individual living with their spouse or civil partner. A person is required to pay Capital Gains Tax (CGT) on the gain when he or she sell or dispose of’:
• most personal possessions worth £6,000 or more, apart from their car
• property that is not their main home
• any shares that are not in an ISA or PEP
• business assets
If a person disposes of an asset jointly owned with someone else, they pay CGT on their share of the gain.
For Capital Gains Tax purposes, married couples are able to transfer assets between themselves and their spouse or civil partner without incurring an immediate CGT liability provided they are not separated. However, the tax rules currently only allow married couples or civil partners who have separated to get ‘no gain, no loss’ treatment up to the end of the tax year in which they separate. Therefore, the transfer of assets between spouses/civil partners after the tax year of separation will be treated as gifts and therefore liable to CGT.
Private Residence Relief (PRR)
PRR may be available if the asset being transferred is the family home and it is your principal place of residence. But, where a spouse/ civil partner moves out of a jointly owned property and lives apart for a period, for example, one person lives with a friend or in rented accommodation, then that will not be a period of actual occupation of the marital home and so there is a potential exposure to CGT in respect of their share upon disposal or transfer of the family home. This is because PRR is only available to a leaving spouse or civil partner up to the end of the tax year in which they vacate the home.
The party remaining in the family home would not suffer any Capital Gains Tax on a sale or the transfer of the property to the other spouse as any gain would be covered by PRR, due to his/her occupancy of the property being continuous since acquisition.
If the vacated spouse later re-occupies the family home, for instance because the couple reconcile, then they may be able to treat the period of absence as a period of deemed occupation provided it does not exceed three years.
Capital Gains Tax rates
The basic rate of CGT is 18% and the higher rate of CGT is 28%. The rate applied is based upon the income of each party. The costs of purchase, such as legal fees and stamp duty, are allowable costs and would therefore result in a reduction in CGT liability. Annual exemptions also apply. Currently the 2022/23 tax year exemption is £12,300.00.
It is common for couples to separate without a desire to rush into formal proceedings. There are also many occasions where divorcing parties become entangled in protracted negotiations. The current CGT implications have disadvantaged parties simply as a result of a relatively short passage of time, causing the vacated party to lose their PRR CGT exemption. Furthermore, upon divorce, CGT has been the cause of much anxiety and has often resulted in delays and acrimony in seeking a financial settlement. Couples have had to obtain specialist accountancy advice to understand their tax position and to factor it into the negotiations.
Changes in Government policy
Earlier this year the government adopted a policy change published on 20th July 2022 to give couples more time to transfer assets between themselves without incurring a possible charge to CGT. July 2022.
It provides that couples be given up to three years in which to make no gain or no loss transfers of assets between themselves when they cease to live together; and unlimited time if the assets are the subject of a formal divorce order.
The policy change is proposed to be introduced in The Finance Bill 2022-23 and apply to disposals that occur on or after 6 April 2023. The proposal will 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;
• there should be no Capital Gains Tax on assets that separating spouses or civil partners transfer between themselves as part of a formal financial order;
• a spouse or civil partner who retains an interest in the former matrimonial home may claim PRR when it is sold;
• individuals, who have transferred their interest in the former matrimonial home to their former spouse or civil partner but are entitled to receive a percentage of the proceeds when the home is eventually sold, will have no CGT applied to those proceeds when received provided the transfer was part of a formal financial order.
This proposed measure will be welcomed by divorcing couples and family lawyers. It will make the process fairer for those spouses who are separating or divorcing and are in process of distributing assets between themselves.
The measure will make a positive impact on individuals negotiating a financial settlement by extending the period of time available and give separating couples at least three years to make transfers between themselves free of CGT liability.
If you would like more information on CGT, please contact Ash Sanger from the family team.
The position and information in this article was correct as of 10th October 2022 and may be subject to change with recent government changes.