Capital Gains Tax – recent changes for separating couples

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This blog sets out the recently proposed changes to Capital Gains Tax in the Government’s draft Finance Bill 2022-23 and how they might impact divorcing or separating couples.

Capital Gains Tax (CGT) is a tax on the profit (gain) when you sell something, for example property (that is not your main home), shares or personal possessions such as art, which has increased in value.

CGT is only payable on gains above your tax-free allowance, which the HMRC refer to as the Annual Exempt Amount. This does change year to year and the current tax-free allowances are on the gov.uk website.

In addition to the allowances, there are also reliefs available. The main relief of note is the Private Residence Relief (PRR) which allows homeowners to sell their main home without being subject to CGT.

Current Law on Capital Gains Tax and Divorce/Dissolution

Any asset(s) sold as part of divorce/dissolution proceedings between the parties rather than transferred is subject to the usual rules on CGT, i.e. there is tax payable on any gain.

Transfers of assets between spouses and civil partners who are still living together are treated as having “no gain or no loss” in the tax year in which they are living together. This means gains or losses are deferred until the asset is sold later.

If a spouse or civil partner moves out of the family home for more than 9 months, then it is likely there will be a CGT liability when they sell or transfer the family home as PPR is not available after 9 months.

A spouse or civil partner who transferred their interest in the family home to their ex-spouse or civil partner and are to receive a percentage of the proceeds when the family home was sold (this is known as a deferred charge), would have to pay CGT on the increased value of the charge when the family home is sold.

The New Proposed Changes

On the 20th July 2022 the Government proposed changes to the current CGT in their draft Finance Bill 2022-23. The proposals are that:

  • Separating spouses or civil partners can transfer assets between themselves at no gain or loss at any time within three years after the year of separation regardless of whether they are still living together or not. The assets transferred must be subject to an Agreement or a Court Order.
  • A spouse or civil partner who separates and moves out of the family home but continues to retain an interest in it will be able to benefit from PRR when the family home is sold later.
  • A spouse or civil partner who transferred their interest in the family home to their ex-spouse or civil partner and are to receive a percentage of the proceeds when the family home is sold will be able to use PPR on those proceeds when received provided they applied when they transferred their original interest in the family home. The deferred charge must have been made in accordance with an Agreement or a Court Order.

What will these changes mean to you?

  1. One less thing to worry about – Separating finances is often a complicated exercise which requires a balancing act. With the changes you will no longer having to worry about a potential CGT liability on transfer with an ex-spouse or civil partner, this will allow parties to focus on other more important decisions.
  2. Fairness – The old CGT rules could be seen as a tax on divorce which is unfair given what divorcing parties are already facing and spouses or civil partners leaving the family home are no longer unfairly punished with a CGT for doing so.
  3. More time – Parties will be under less pressure to finalise their financial settlement within 9 months to avoid the consequence of CGT. Also, if parties are currently engaged in court proceedings they will not be punished if their litigation overruns as it can often take 18 months or more to obtain a final order.
  4. No hidden tax bill – If you agree to a defer charge you will not have to worry about a CGT tax bill later down line. Depending on what has been agreed or ordered in relation to the deferred charge, this could possibly be 5 or even 20 years later when the property is sold and the deferred charge comes to an end.

Raj Patel is a family law solicitor in our Brighton team. Contact us for a confidential discussion about your circumstances.

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