Winckworth Sherwood partner Sarah Ingram explains how CGT changes could impact divorcing couples, to ePrivateClient website.
Earlier this year, the Office of Tax Simplification (OTS) published its second report as part of UK Chancellor Rishi Sunak’s July 2020 request that it review Capital Gains Tax (CGT) and aspects of the taxation of chargeable gains in relation to individuals and smaller businesses.
Part of that report was devoted to considering CGT on divorce and separation, including charges to CGT on assets transferred between separating spouses and civil partners and the interaction of those rules with the Private Residence Relief rules.
The Treasury has now responded to this report, supporting the OTS’s recommendation that the government should extend the ‘no gain no loss’ window on separation to the later of: the end of the tax year at least two years after the separation event; or, any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent processes in Scotland.
There will be a consultation on the details of this change over the course of the next year which looks to be good news for the majority of divorcing couples and civil partners who are impacted by this change.
As the law currently stands, married couples or civil partners can, subject to a few exceptions, transfer jointly or solely owned assets between each other without triggering an immediate charge to CGT (in other words, no gain no loss). Couples who have separated continue to benefit from this provision and receive the same tax treatment as their married counterparts but, importantly, only in the tax year of their “permanent separation”.
What amounts to “permanent separation” for tax purposes can vary but is generally considered to be separation by way of court order (e.g. decree absolute, decree of judicial separation or a court order transferring assets in accordance with a financial agreement approved by the court) or a formal deed of separation. Separation is not automatically linked to whether or not a couple is still living together, although this may have an impact on the departing party’s private residence relief.
Once that year has passed (or nine months in relation to the matrimonial home where one party has moved out and acquired another property), any transfers will be treated as having taken place at market value, and there could be a capital gain (at a hefty rate of 20 percent for higher or additional rate taxpayers for all gains except residential property and carried interest where it is 28 percent) even if no cash has changed hands.
This impacts not only high net worth individuals transferring millions of pounds worth of assets, but also couples transferring their share in the matrimonial home, where one party has already moved out and purchased another property.
Between 2019 and 2020, it took an average of 53 weeks between a divorce petition being issued to the pronouncement of Decree Absolute (a time frame which does not account for the fact that many couples will actually separate in advance of issuing divorce proceedings).
An agreement over the ancillary finances can take as long if not longer than the time taken to finalise the divorce, with couples often unable to remain together in the matrimonial home for that length of time because of the ongoing tensions, but often doing so because of fears over tax they may incur if they do. Therefore, the government’s proposed extension of the no gain, no loss window will offer some relief and a significant tax saving to the majority of separating spouses and civil partners.
This article originally appeared in ePrivateClient.