Important changes to the current Capital Gains Tax (“CGT”) rules that apply to the transfer of assets between separating and divorcing spouses (and civil partners) are due to be introduced in the new financial year. The new rules will apply to the disposal of assets on or after 6 April 2023 between spouses and civil partners who are in the process of separating and divorcing.
What are the current rules?
At present, spouses and civil partners can transfer assets between themselves on a “no loss, no gain” basis to the end of the tax year in which they separate, without triggering CGT liability. After the end of the tax year of separation, any transfers between separating and divorcing spouses are treated as normal disposals for CGT purposes. Moreover, Principal Private Residence Relief (“PRR”) from CGT on the sale or transfer of the former family home only applies for a period of 9 months to a spouse who has moved out of the former family home. This can result in significant future CGT liability in a situation where the former family home is retained for a lengthy period, for example where the other spouse goes on living in the former family home with the children of the family until all the children have completed their full-time education.
What are the proposed new rules?
Separating spouses (and civil partners) will have up to three years after the tax year they cease to live together to make transfers of assets on a no loss, no gain basis. They will have unlimited time to transfer assets between themselves if the financial arrangements are part of a formal divorce agreement, without incurring CGT.
Individuals who have transferred their interest in the former family home to their former spouse or civil partner but are entitled to receive a portion of the sale proceeds when the former matrimonial home is eventually sold, will be able to apply the same tax treatment to those proceeds as when they transferred their original interest in the home to their ex-spouse or civil partner.
Individuals who have retained a financial interest in their former family home following separation will be given an option to claim PRR when the property is eventually sold.
What will be the impact of the proposed changes?
These proposals are intended to provide a fairer tax regime for couples who are experiencing separation and divorce and going through the process of dividing the family assets. They will no longer be required to transfer any family assets in the tax year of separation to avoid paying CGT. These tax changes represent a very significant change in the rules and will be very welcome to divorcing spouses experiencing the deterioration in their financial positions which inevitably accompanies the separation and divorce of all but the very wealthy.
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