It was a relatively quiet budget yesterday in terms of the changes that will impact financial remedy proceedings. The main headlines are the pension changes and the confirmation that the new CGT rules for divorcing couples, which look set to come in from 6 April 2023. This short blog summarises the relevant announcements.

Pensions

The major change is the removal of the pensions lifetime allowance charge (LTA). The LTA is the maximum amount of benefits that a member can crystallise at retirement without incurring an additional charge. For the 2022/23 tax year the LTA is £1,073,100 The Chancellor announced that the LTA will be removed from April 2023 and the LTA abolished entirely from April 2024.

From 6 April 2023 taxable benefits above the LTA will be taxed at the individual's normal marginal rate of income tax and not at the 55% tax rate imposed by the LTA. At the moment individuals can take out 25% of their pension tax free. However, from first reading, it appears that the 25% tax free lump sum will be capped by the LTA threshold in 2023 (meaning the max an individual can withdraw tax free is £268,757 – being 25% of £1,073,100). Once the LTA is abolished in 2024 the tax free lump sum is likely to be subject to a new cap in the future.

Frustratingly this is likely to mean PODE reports which address the LTA will need to be revisited if the proceedings are ongoing at 6 April 2023.

Capital Gains Tax

The government indicated that they intend to go ahead with the changes to capital gains tax on divorce. This change will remove the tax charge on individuals when they are transferring assets as part of divorce. Instead, the asset will pass to the new owner with latent CGT, the new owner is then responsible to pay the CGT on sale.

This measure was drafted into legislation on 22 July 2022, it has not yet received Royal Assent although this is expected on 23 March 2023. Therefore for any transfers between divorcing couples on or after 6 April 2023 there will be no immediate capital gains tax payable and no reporting requirements.

If assets are being sold as part of a divorce this will still be subject to capital gains tax as normal. The CGT annual exemption is being reduced from £12,300 to £6,000, so more individuals are likely to be liable for CGT. If a jointly owned asset had a profit of £20,000 there would be no capital gains tax payable – assuming both parties had their full exemption. From April 2023 that gain would now bring them into the scope of paying CGT and also filing the relevant forms.

Reminder of previous announcements which will come in from 6 April 2023

Businesses: The corporation tax rate is still set to increase from 19% to 25% in 2023. The increase will apply to those businesses making profits over £50,000. For companies with profits over £250,000 the corporation tax rate will be 25%. For business making profits under £50,000 the corporation tax rate will remain at 19%. For businesses with profits between £50,000 to £250,000 the rate will be between 19% to 25%.

45% Tax Rate threshold is being reduced: The 45% rate will start at £125,140. This means slightly less after-tax income for higher earners.

Dividend allowance: The tax free dividend allowance is being reduced from £2,000 to £1,000