Capital Gains Tax and Divorce – How to prepare for upcoming changes?

Divorcing couples and those dissolving civil partnerships have been given a new opportunity to save and defer tax thanks to changes from 6 April 2023. This new legislation will ensure the transfer of assets does not lead to a sudden Capital Gains Tax (CGT) liability for up to three years from separation.

The new rules, which will affect transfers made on or after this date, offer a significant saving to taxpayers in this position who currently face a much shorter period in which to make transfers following a break-up that is aligned instead to the tax year.

Current CGT rules for divorce and civil partnership dissolution

Under the current rules, a married couple or civil partners can make CGT-free transfers of assets between themselves.

In most cases, this allowance ends once the tax year ends following a separation. This means, for example, that a couple who divorce on 5 January only has four months in which to use their remaining tax-free transfer window before the start of the new tax year on 6 April.

After this period, transfers of assets, including any property such as the family home, might be subject to a CGT bill. In the case of property, such as the main home, this can mean a significant tax charge – with higher rate taxpayers paying CGT at a rate of 28 per cent on disposals or transfers of residential property.

Clearly, this can put additional strain and pressure on an already acrimonious process and leave newly separated spouses at a financial disadvantage.

This is further complicated by recent changes to the CGT rules on property that require gains to be reported – and settled – within 60 days of a transfer or sale completion.

Inevitably this creates a scenario where recently divorced or legally separated individuals face a significant tax bill with little notice, and often without previous experience, in reporting, managing and paying property tax liabilities.

What is changing?

Under the changes, couples will soon have three years from separation to transfer their assets without triggering a CGT charge.

Whilst taxpayers in this position will still be obligated to report and pay any CGT due when an asset is eventually sold, this amendment to the rules delays this and gives them a better opportunity to plan transfers and disposals.

This should alleviate the pain points that many divorcing and separating couples feel – giving them a little bit more breathing room to get their affairs in order before facing a sudden tax bill.

Alongside these changes to timeframes around transfers, disposals and CGT, the Government will also introduce, from next year, changes to Private Residence Relief (PRR) so that both couples can benefit from this CGT tax-free allowance, which ensures that no tax is due on the disposal of a ‘main home’.

Currently, if a spouse chooses to move out of the main home, they often become ineligible for this relief, sometimes creating a significant CGT liability in future.

This is amplified when their former spouse chooses to hold onto the property and sell at a later date, thereby, creating a larger gain from an eventual sale. This is often the case where a home is retained for the benefit of the other spouse and children.

Under the proposals, where a spouse leaves the main home but retains an interest in it, they can elect for that property to continue to be their main residence.

This extension of the relief would also be extended where a Court orders the property to be transferred entirely to the other spouse but retains an entitlement to receive a percentage of the proceeds on a sale.

This could be particularly important when a person moves out of a valuable family home, into a cheaper property, where the gains are less significant from a future sale. Providing this election allows them to benefit from the higher value sale, without being unfairly penalised.

However, it is important to remember that in many cases, these changes mean that the spouse who receives a transfer of property under these expanded provisions will be receiving an asset with a latent tax liability, It is important that they are advised correctly in respect of this potential liability to ensure they have no unpleasant surprises when they come to dispose of the asset at some point in the future.

Can already separate couples benefit from this change?

At present, the changes will only apply to transfers after 6 April 2023. All divorces or dissolutions of civil partnerships that occurred before this date will not benefit from these changes.

As a result, some couples currently considering a separation or undergoing a divorce may wish to consider delaying this until after these new rules come into effect, if possible.

By doing so they could significantly reduce potential CGT bills from the transfer and eventual sale of assets, particularly their main home.

While legislation is yet to be fully enacted for these changes, they are expected to go ahead with minimal amendment next year and so individuals must seek advice if they believe they may be affected by these new rules.

Want to know more about how this change might affect you? Please speak to our team today.

Posted in News, Newswire.