The Government has published proposals that will allow divorcing couples to transfer assets for up to three years post separation without triggering a capital gains tax liability, write David Hodgson and Helen Langworthy.
Married couples and civil partners can transfer assets between themselves on a ‘no loss, no gain’ basis at any point during their marriage or partnership without fear of triggering a capital gains tax liability. However, once they separate, that stops at the end of the same tax year (5 April).
This has seen couples who start divorce proceedings early in a calendar year have just a few short weeks to agree and complete any asset transfers or face potentially large capital gains tax bill. And to add further complications, any CGT bill arising from the sale or transfer of a residential property must be paid within 60 days. That has the potential to cause financial challenges, particularly if the financial settlement has yet to be completed.
The proposals, which the Government intends to introduce from 6 April 2023, will allow separating and divorced parties to transfer assets for either up to three years without incurring CGT, or later if the transfer of assets is in accordance with a financial agreement approved by a court. This represents one of the most significant changes to the taxation of separating couples for some time.
These changes will be welcomed by separating couples giving them time to plan their financial affairs without the added complexity of having to complete the transfer of assets before a divorce or separation is agreed. CGT will still have to be quantified in any settlement as the person to whom any asset is transferred will inherit a latent liability for CGT, subject to any available exemptions, which will be payable on disposal. It will however assist in terms of cash flow as tax will not be immediately payable.
At the same time the Government has announced potential changes to CGT reliefs for divorcing couples.
Principal Primary Residence Relief (PPR) is a relief on the sale or transfer of a family home which means capital gains tax is not paid on any increase in value in that home. A person can only elect for such relief on one property and when a spouse moves out of the family home, they are currently only exempt from any CGT liability for a 9 month period after they have left.
There is a possibility of extending this relief if the person leaving transfers their interest in the home to an occupying spouse and has not elected another property as their Principal Primary Residence. However, if the property is sold or they are to retain an interest in the home, there are still tax consequences beyond that. This can cause a significant future tax liability if the main home is being retained for a significant period, say until the children have reached a certain age.
The new proposals will extend this relief as long the retention of an interest in the property is pursuant to a financial order made in the context of divorce, nullity or judicial separation proceedings. The relief will also cover transfers of interests to third parties, and if they are retaining an interest, will continue until their interest is eventually realised, provided that they have not elected another property as their Principal Primary Residence.
Therefore, those who have not elected Principal Primary Residence Relief on another property will benefit from a tax saving
Questions do, however, remain.
It is unclear in the proposed legislation whether the changes will be backdated to those that have already started divorce proceedings. If they do not, separating couples may have to face a difficult decision as to whether to wait until April 2023 or go ahead in the knowledge that they may face an unwelcome tax bill.
Tax is often not the first thing on the minds of separating couples but can have long lasting and unforeseen implications. It is advisable to take advice as early as possible to ensure tax affairs are properly considered when separating.
Contact our Private Client Team
If you are affected by issues covered by this article, or would like to have a related discussion in confidence, please call Helen Langworthy, Partner in the Private Client team on (0)20 7079 4196 or email firstname.lastname@example.org.
The above is accurate as at 01 September 2022. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.