CGT and Divorce – Changes Ahead in 2023
The government has recently released a draft legislation and policy paper called “Capital Gains Tax: Separation and Divorce”. It sets out the rules and proposed changes to the transfer of assets between a separating couple and the treatment of Capital Gains Tax. The draft could see its implementation taking effect from 6 April 2023.
Most couples and civil partners in the process of separating believe it is a welcome development and will give them sufficient time to transfer assets without triggering CGT liabilities.
It is important for a couple who have decided to go separate ways to learn about the CGT treatment on the transfer of assets. At present, a couple has to face CGT consequences if assets are not transferred at the right time.
Before learning about the proposed changes, it is important to know about the existing CGT rules.
Current Legislation
At present, the timing for transferring the asset is important so as to not incur CGT liability. Under the current legislation, the separating couple have short time to transfer assets for no gain, no loss.
Assets Transferred During the Tax Year of Separation
Under the current legislation, if the separating couple transfers assets by the end of the tax year in which they separate, not later than 5 April, in this case, the concerned parties would not have to pay Capital Gains charges and can transfer the assets on no gain and loss.
Chargeable assets include business assets, property, shares, and personal possessions.
Assets Transferred After the Tax Year of Separation
If the separating couple fails to transfer assets during the tax year of separation, they will not be entitled to the benefit of the no gain and no loss treatment.
Moreover, if the assets are transferred later than 5 April, the CGT will be payable as the chargeable asset is considered to be sold to the other party at market value.
As a result, the transferring party may have to pay CGT charges.
Problems with the Existing CGT Rules
The current rules make it difficult for couples separating towards the end of the tax year to negotiate a financial settlement and transfer assets prior to the end of the tax year i.e 5 April.
If the couple separated at the beginning of the tax year but were not aware of the tax savings as a result of the transfer of assets, they have to take necessary steps within a limited time to reduce tax liabilities.
If the couple fails to agree on the transfer of assets, it will be stressful and significantly expensive for the parties involved.
Summary of Proposed Changes
The government plans to introduce new changes to make the process of transferring assets less complicated. The following changes relating to CGT will be introduced from 6 April 2023
- The separating couple will have up to 3 years from the end of the tax year in which they separate to transfer chargeable assets and benefit from the ‘no gain no loss CGT’ treatment.
- No CGT will be chargeable on assets that divorcing couples or civil partners transfer as part of the formal divorce agreement or separation order.
- As a result of a formal divorce agreement, the ex-partners have unlimited time to make a ‘no gain no loss’ transfer of assets.
- Either partner who has an interest in the former family home will have the option to claim a Private Residence claim on the sale of a matrimonial home.
- If the interest in the former family home is transferred to the ex-spouse or civil partner in return for a percentage of the sale proceed when the matrimonial home is sold, Capital Gains Treatment (no gain, no loss) is also applied to those proceeds if the individual transferred their interest immediately on divorce or separation.
Wrap Up
The government has extended the CGT treatment window to make it fairer for the separating couples and reduce the stress and financial pressure on the concerned parties.
Disclaimer:
The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Connaught Law and authors accept no responsibility for loss that may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please don’t hesitate to contact Connaught Law. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Connaught Law
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