Major Tax Changes For Divorcing Couples – how will you benefit?

On 22 July 2022, the government released draft legislation, which recommended changes to the capital gains tax position for divorcing couples and partners undergoing dissolution of their civil partnership. The implementation date was 6 April 2023 and there were no major changes made to the initial drafts.

Amidst the current financial uncertainty within the UK and in anticipation of the measures outlined in the new Growth Plan coming into effect, it is a welcome anticipated change.

Current law

When couples divorce, tax may not be an issue that is immediately at the forefront of their minds. To an extent, they are right. In most cases, transfers between spouses are exempt from inheritance tax so most divorces are structured so that the division of assets is agreed before the marriage (or civil partnership) is finally brought to an end. However, there is no such blanket exemption for capital gains tax, which can add to the complexity and expense of agreeing a financial settlement and throw up unwelcome surprises years down the line. Fortunately, the draft Finance Bill 2022/23 sought to reduce the Capital Gains Tax ‘CGT’ burden during a time, which is often already challenging in terms of emotional grief and financial uncertainty.

The previous law stated that married couples had 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 took over ownership of the asset at the original base cost. Once the tax year is over any transfers taking place between the couple were done at market value.

For example, if Mr and Mrs Smith had been separated for over a tax year and Mr Smith transfered a property to Mrs Smith, Mr Smith would be assessed to capital gains tax on the gain on transfer (where there is no other relief available to claim exemption from paying CGT). He would have been deemed to sell the asset to Mrs Smith for the market value at the time of the transfer. Even though Mrs Smith had not in fact paid market value (or anything) for the property and Mr Smith did not have any sale proceeds from which to pay. Understandably, Mr Smith was not going to welcome the fact that he was having to pay CGT as a consequence of giving the property to Mrs Smith. It also meant that there would be less resources to be divided between the couple.

New rules

The new rules for disposals on or after 6 April 2023 introduced a much more favourable tax treatment. The HM Revenue & Customs policy paper states that divorcing couples will have up to three years to transfer assets such as property, shares and business interests under the neutral tax break of ‘no gain, no loss’ for capital gains tax purposes. This will especially benefit those parties involved in more complex proceedings, as it means that more time can be spent on the divorce considerations, rather than Capital Gains Tax considerations.

In summary, the changes are as follows:-

  • Extending the ‘no gain no loss’ for three years after the end of the tax year of separation.
  • Extending the ‘no gain no loss’ for the whole period providing the couples are transferring assets pursuant to a formal divorce agreement or court order.
  • Allowing non-occupying spouses of the family home to benefit from Private Residence Relief on sale.
  • Providing additional relief for individuals who enter into a deferred charge arrangement over the main home relief on sale.
  • Individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner, and are entitled to receive a percentage of the proceeds when that home is eventually sold, will be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the home to their ex-spouse or civil partner.

Patience, efficiency and accuracy are key factors in ensuring the divorce process runs as smoothly as possible. These are the positives as a result of the change in legislation as there may now be a longer period of time within which to seek financial advice, and to agree on the division of assets within the marriage without the additional burden of a short and firm deadline in which to complete the distribution.

Our family law team can guide you through the process of divorce and any tax implications. Please contact Laura Martin or a member of her team on 01258 459361.

Blanchards Bailey

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