Upcoming Changes to Capital Gains Tax on Separation and Divorce

Some of the rules surrounding Capital Gains Tax during separations have been seen as unfair, says Nick Giles, Tax consultant at Page Kirk. Now, they are set to change.

For Capital Gains Tax (CGT) purposes, the UK tax system essentially treats spouses and civil partners (from here on referred to as couples) as a single unit if they live together – allowing ownership of assets to pass between them without triggering CGT liabilities.

This is achieved by the “no gain/no loss rule” which deems an asset to be transferred to one partner at a value equal to the cost for the other partner.

For tax purposes, a couple are automatically treated as living together unless they have separated under an order of a court, by a deed of separation or under circumstances where the separation is likely to be permanent. Where a couple separate in any of these situations, the tax treatment for transfers of assets between partners changes.

The current rules are that the no gain/no loss rule can be applied to a couple from the date of separation to the end of the tax year. However, after this point, any transfers between the couple made up until the date of divorce will be treated, for tax purposes, as being made between connected parties and must take place at market value. Where an asset has increased in value, this would mean a capital gain would arise on the transfer.

These rules have always been seen as arbitrary and unfair.

Firstly, a separating couple have until the end of the tax year to transfer assets between each other on a no gain/no loss basis. Treatment is therefore unequal between couples depending on when they separate. A couple separating in the middle of April have nearly 12 months in which to transfer assets without triggering tax liabilities, whilst a couple separating in March may have less than a month.

Secondly, the division of a couple's assets should put them in a fair position based on their share and entitlement to their joint assets. Introducing tax liabilities can make a couple significantly worse off individually and may result in tax payments that cannot be met, as no assets have been disposed of for cash. It can also introduce inequity in terms of the tax treatment of different assets, where, for example, one partner surrenders their share in the family home, which is exempt from CGT and the other surrenders their share of other assets which are liable to CGT.

Fortunately, these rules are expected to change in April 2023. The proposals would see an extension to the no gain/no loss treatment for separating couples to the earlier of the third anniversary of the 5th April following the date of separation (eg if a couple separated on 1st September 2022 the no gain/no loss treatment would apply until 5th April 2026) or the date the couple divorce or have the partnership dissolved or annulled.

These changes should bring some welcome relief to separating couples faced with potential tax liabilities. They will apply to transfers of assets made after 6th April 2023. The date of separation does not need to be before this date. Separation is incredibly difficult for all parties concerned and tax cannot always be the dominant factor. However, if there are any couples going through the separation process, who can wait until after 6 April 2023 to transfer assets between them, the proposed tax changes present a welcome opportunity to save money on unfair tax liabilities.

Page Kirk have extensive experience in dealing with the tax implications of separation and divorce and can help you and your legal advisors navigate the complex rules in a compassionate and professional manner.

For more information, call Page Kirk on 0115 955 5500, email enquiries@pagekirk.co.uk or visit their website, www.pagekirk.co.uk.