Changes to Capital Gains Tax: Separation and Divorce

HMRC policy paper ‘Capital Gains Tax: Separation and Divorce’ was issued on 20 July 2022 and outlines proposals to extend time limits for the division of property between separating and divorcing spouses and civil partners. The Autumn Statement has not impacted this policy paper or the proposals.

The new policy introduces greater fairness in a system that had previously allowed only a short window of opportunity to make transfers without Capital Gains Tax (“CGT”) being levied.

These changes apply to disposals that occur on or after 6 April 2023.

What is the current law?

The legislation at S58 TCGA provides that transfers of chargeable assets (for example, shares and real estate) between spouses and civil partners are made on a “no gain or no loss basis” in any tax year that they are living together.

Consequently, a no gain no loss transfer was only available in relation to disposals made in the remainder of the tax year in which the separation happened. Thereafter, all disposals between the separated couple were treated as being made at market value between connected persons for CGT purposes, often leading to some quite sizeable CGT liabilities.

What are the changes?

The proposed new legislation will mean:

• Separating spouses or civil partners will be given up to three years after the year they cease to live together in which to make no gain or no loss transfers.
• No gain or no loss treatment will also apply indefinitely to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement.
• A spouse or civil partner who retains an interest in the former matrimonial home be given an option to claim Private Residence Relief (PRR) when it is sold.
• Individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold, will be able to apply main residence relief to those proceeds when received. This will remove from the CGT net, any increase in value over the original cost price, despite the fact that the departing spouse may have lived elsewhere for many years.

By way of an example, a couple decided to separate on 15 January 2022, with one spouse moving out of the marital home two weeks later. They had both subscribed for shares in the family trading company at par value some years earlier and their shareholdings were now standing at a significant gain. On 13 July 2022, one spouse makes a transfer of their shares to the other.

Under the old rules, the couple had until 5 April 2022 to transfer the shares between one another free of Capital Gains Tax. Unfortunately, because the spouse transferring the shares failed to delay transfer until after 6 April 2023 (commencement of the new rules), the gain will be assessed to Capital Gains Tax. Contrast this with a situation where the shares had been held onto post 6 April 2023. The transferring spouse would then have had until 5 April 2025 to make the transfer (i.e. the third anniversary of the 5 April following the end of the year in which separation occurred) free of tax.

What are the impacts?

The new rules are expected to make the process fairer for spouses who are separating or divorcing and are in process of distributing assets between themselves.

This will particularly benefit those involved in more complex proceedings that extend beyond one tax year.

We are often instructed to value businesses (or interests therein) for the purposes of matrimonial proceedings, and to comment upon the tax implications on the sale of shares. This new legislation will enable parties to mitigate their capital gains tax liabilities arising from the proceedings more effectively than they would have done previously.

There is the potential for less Capital Gains tax to be paid overall by the parties involved because of the extended no gain/no loss window.

If you would like to discuss any of the above further from a valuation perspective, please do not hesitate to get in touch with Paul Webster or Tom Wacher in our Tax and Forensics and Business Valuations teams.