Major tax changes for divorcing couples
Published: 21/07/2022 07:17
Yesterday (22 July 2022) the government released draft legislation which will change the capital gains tax position for divorcing couples. At the moment the legislation is in draft form and is subject to changes, however, the proposed implementation date is 6 April 2023 and we do not anticipate any major changes to the drafts.
The current law states that married couples have until the end of the tax year in which they separate to transfer assets between themselves at ‘no gain no loss’ meaning that there would be no immediate tax payable on transfer and each party takes over ownership of the asset at the original base cost. Once the tax year is over any transfers taking place between the couple are done at market value. If Mr and Mrs A have been separated for over a tax year and Mr A transfers a property to Mrs A, Mr A will be assessed to capital gains tax on the gain on transfer. He will have been deemed to sell the asset to Mrs A for the market value at the time of transfer.
The proposed changes are:
- Extending the ‘no gain no loss’ for the whole period providing the couples are transferring assets pursuant to a court order
- Allowing non occupying spouses of the family home to benefit from PPR relief on sale
- Providing additional relief for individuals who enter into a deferred charge arrangement over the main home
The above are welcome changes which the tax and family law world have been lobbying for for many years. This will enable many couples who are going through divorce to transfer their assets between each other without incurring an immediate capital gains tax liability which often comes at a time when neither party has sufficient cash to settle the liability. These changes with regards to the family home will also enable those who have the left the home to be able to benefit from PPR relief on sale. The current rules penalise those that have left the property as they can no longer benefit from full main home (PPR) relief.
The changes will not impact any assets that are sold as part of proceedings. The capital gains tax position on sale will remain the same (CGT payable within 60 days of sale).
Taking each in turn:
a) Extending the ‘no gain no loss’ window to 3 years from the point of separation or for any period provided the assets are transferred pursuant to a court order
The legislation says that the no gain no loss window is granted to individuals in cases where the transfer takes place
(c) before the earlier of— (i) the last day of the third year of assessment after the year of assessment in which A and B ceased to live together, or (ii) the day on which a court grants an order or decree for A and B’s divorce, the annulment of their marriage, the dissolution or annulment of their civil partnership, their judicial separation or, as the case may be, their separation in accordance with a separation order.
Therefore, there is an unlimited period of time for couples divorcing to transfer assets between themselves providing the transfer is pursuant to a court order.
b) Allowing non occupying spouses of the family home to benefit from PPR relief on sale
At the moment when one party moves out of the family home, if they are out for more than 9 months they will face a CGT charge when they sell or transfer the property. These new rules allow for that individual to claim PPR on the sale even for the periods that they have been absent from the home providing that the sale and absence is due to divorce.
c) Providing additional relief for individuals who enter into a deferred charge over the main home
At the moment when a party enters into a deferred charge over the main home the charge is a new asset for CGT and when the charge is paid the increase in value is subject to CGT. The new rules allow that party to claim PPR relief on that gain and thereby reduce the liability to nil.
The legislation is clear that from 6 April 2023 (if enacted as is) couples separating in 2023-24 will have until 5 April 2027 to transfer assets between themselves without incurring any immediate tax liability. What is slightly less clear is what is the position for couples who say separated in Feb 2022? Currently the position looks as though they had until 5 April 2022 to benefit from the ‘no gain no loss’ rules under current law but if they wait until 6 April 2023 they will then benefit from the new rules and can again transfer assets without incurring immediate CGT.
Previously the government had said that they would consult on the potential changes, there was no consultation before the draft legislation was published today. Professional bodies are invited to comment on the draft legislation and make comments as to whether it serves the intended purpose.