Welcome changes proposed to the Capital Gains Tax rules for separating spouses and civil partners
HMRC have announced plans that will produce welcome changes to the Capital Gains Tax (CGT) treatment of assets transferred between spouses and civil partners who are in the process of separating. Legislation will be introduced in the Finance Bill 2022/23 that will give separating couples more time to transfer assets between themselves without incurring a possible charge of CGT.
The existing position is that assets transferred between separating spouses and civil partners made during the tax year of separation are made on a ‘no gain/no loss’ basis so no CGT is payable upon the transfer. After that, transfers are deemed to take place at market value and CGT will be payable depending on the gain at the point of transfer.
Therefore, separating couples are given little time to agree and finalise their financial arrangements, especially if they separate in say March prior to the end of the tax year in April.
From 6 April 2023 the time limit is to be extended and separating spouses and civil partners can benefit from ‘no gain/no loss’ transfers for three years after the year they cease to live with each other. Moreover, if the assets are transferred as part of a formal divorce agreement, the separating couple will be given unlimited time to settle those assets and benefit from no gain/no loss treatment.
There will also be changes to the rules concerning Principal Private Residence (PPR) relief. Under the current rules, the departing spouse or civil partner is deemed to be resident in the house for a further nine months, even if they have already acquired another house as their main residence. Any sale or transfer of the former matrimonial home after this nine month period could give rise to a CGT charge. This nine month period can be extended but the property must be transferred to the occupying spouse or civil partner as part of the financial settlement and the transferor must not have elected for any other property to be their main residence in the meantime.
However, from 6 April 2023, a spouse or civil partner who retains an interest in the former matrimonial home will be given an option to claim PPR when it is sold. Moreover, individuals who have transferred their interest in the former matrimonial home to their ex-spouse and who are entitled to receive a percentage of the proceeds when that home is eventually sold, will be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the home to their ex-spouse or civil partner.