Capital gains tax and separation/divorce

Aug 23, 2022 | Tax Tuesday, Taxation

Separation and divorce is an unfortunate fact of life.

However, on the bright side, some long overdue changes (in your Tax Tuesday author’s opinion) to the capital gains tax (CGT) rules relating to separating couples are being introduced.

While at this stage, the proposals are draft legislation (so subject to possible change), they are expected to be introduced from 6 April 2023.

Normally, where an asset which stands at a gain is gifted from one person to another, a ‘dry tax charge’ (a charge for which no funds are raised to pay it) arises.

This charge is based on the market value of the asset at the time of the gift less its original base cost plus any enhancement/improvement costs and certain incidental costs of acquisition/disposal.

It is a well-known relief that. generally, spouses or civil partners living together can transfer assets between each other at ‘no gain, no loss’ so avoiding this CGT charge.

Individuals who are married or in a civil partnership are deemed to be ‘living together’ unless:

– they are separated by a deed of separation or court order or;

– they are separated in a situation which is likely to be permanent.

If the relief applies, the spouse receiving a capital asset (such as a share in a property) will ‘inherit’ from the donor spouse the cost of the asset they are gifted.

This means on a subsequent disposal by the recipient spouse, the gain on which CGT is calculated uses the original base cost (normally the actual cost) of the asset to the donor.

Currently this treatment applies until the end of the tax year in which separation occurs (NB there is an extension of ‘main residence’ CGT relief in some limited cases which can effectively remove a charge on a transfer of the marital home after this).

The current rules therefore provide a very short window of time for a separating couple to agree on the split of their assets at a time which is likely to be very stressful anyway.

The proposed changes mean from 6 April 2023 couples will have up to three tax years from the end of the tax year in which they separate to transfer assets on a no gain, no loss basis and an unlimited period if the transfer occurs as part of a formal divorce agreement.

Couples who have recently separated or are currently going through a separation should consider their own circumstances in light of these impending changes.

As the legislation is currently drafted, a couple who separated in say February 2022 generally could only transfer assets without CGT up to 5 April 2022.

Couples in this situation i.e. those recently separated who parted ways before 6 April 2022 may wish to consider delaying any asset transfers (if practical) until after 5 April 2023.

Couples separating in the current tax year (i.e. the year ending 5 April 2023) should be covered by the new rules.

Questions about Capital Gains Tax planning? Contact your usual relationship principal, email or call 0161 905 1616.

The author takes every care in preparing material to ensure that the content is accurate and up to date. However no responsibility for loss occasioned to any person acting or refraining from acting as a result of this material or from making use of this material can be accepted by the author.