Welcome changes to capital gains tax rules on divorce by Caroline East
Family lawyers are sighing with relief thanks to the new Capital Gains Tax provisions in the Finance Bill 2022/23. From 6 April 2023 their clients will no longer be caught up in what has, for a long time, been regarded as a deeply unsympathetic capital gains tax trap. Prior to the relevant provisions of the Finance Bill coming into effect, spouses could only transfer assets from one to the other at no gain or loss during the tax year of separation. If assets were transferred in the tax year following separation, an immediate capital gains tax liability arose. This had potentially devastating financial implications for families in terms of there being ‘enough to go round’ following divorce. Whilst many families could have coped with the Capital Gains Tax being paid out of their estate on death (i.e. many years into the future), the immediacy of the liability was debilitating in terms of the family’s finances at a time when things were already financially (as well as emotionally) difficult. Take, for example, a couple who purchased a second property twenty years ago for £400,000 which they then rented out to tenants, and which had since appreciated to £700,000. Previously if the couple had separated on, say, 4 April, they would only have had up until midnight on 5 April to reach an agreement about the division of their finances, including how the rental property should be dealt with and to whom it should be transferred (these agreements usually take months to reach). Otherwise, from 6 April, the no gain / no loss rule would no longer apply, because they would no longer be transferring assets within the tax year of separation. So a matter of the clock striking midnight on 6 April would, in this case, have left the couple exposed to an immediate tax liability on the gain. Had the couple separated on 7 April, they would have had almost a whole year to reach an agreement as to the financial division of their assets before the Capital Gains Tax liability would have been triggered.
So the timing of the separation was crucial, and in some cases, deeply unfortunate. However, going forward and thanks to the Finance Bill, there will no longer be a time limit in terms of separating spouses transferring assets between them, provided the transfer forms part of a formal agreement (a consent order) within financial remedy proceedings. The Finance Bill has introduced other changes as well, including:
· separating spouses should now be given up to three years after the year they cease to live together in which to make no gain / no loss transfers; and · a spouse who retains an interest in the former matrimonial home should (subject to certain conditions) be given the option to claim private residence relief when it is sold.
Unsurprisingly, the vast majority of couples do not consider tax rules that may or may not apply to their assets before they decide to separate. These are therefore welcome developments in terms of the government helping separating spouses manage their finances in a tax efficient manner following relationship breakdown.
As a general rule, separating spouses tend to benefit from working together with their advisors in relation to the tax issues in their case. POD members thoroughly recommend clients seeking tax advice very early on (even before a divorce petition is issued). Trusted tax advisor, David Foster, is a member of the POD and works closely with the family lawyers in the POD for the benefit of clients. David provides UK and US personal tax advice with a focus on international aspects.