Relaxed tax rules for divorces in the works

Aug 3, 2022

The Government has announced plans to relax capital gains tax (CGT) rules in divorce settlements, meaning spouses and civil partners will have more time to transfer assets without incurring CGT charges.

If the new rules are approved, they will come into effect from 6 April 2023.

Newly separated couples are currently given until the end of the tax year to transfer assets without incurring CGT, a period known as "no gains, no loss".

However, if the transfer takes place in the tax year after their separation, the assets are deemed at market value, and CGT could be due.

The main issue with CGT during divorce proceedings is that it incurs another charge when there is already a lot of money spent on the divorce itself, so cash may be low for each individual.

What are the main changes?

If approved, the changes will mean that separating spouses or civil partners will be given up to three years after the year they cease to live together to make a no gain, no loss transfer.

These transfers will also apply to assets being separated between spouses or civil partners and can be transferred between themselves as part of the divorce agreement.

Any person who holds an interest in the former matrimonial home will be given a chance to claim private residence relief (PRR) when it's sold, but only if the sale and absence from the property are due to divorce.

Anyone who has transferred their interest into the former matrimonial home to their ex-spouse or partner will be entitled to receive a percentage of the proceeds when that home is sold.

They will also be able to apply the same tax treatment to those proceeds that applied when they originally transferred their interest to their ex-spouse or partner.

Any changes will not affect the CGT on sold assets as part of the divorce proceedings, and people will still have to pay CGT within 60 days of the sale.

Expert reactions

Danny Clifford, chair of the Chartered Institute of Taxation (CIOT) private client committee, said:

"Extending the no-gain no-loss rule to separating married couples and civil partners is a sensible reform, which CIOT and the Office of Tax Simplification (OTS) have been calling for.

"In practice, those with professional advice are more likely to be able to navigate the rules and avoid the CGT charge while those without professional advisers frequently fall foul of it."

The Association of Tax Technicians (ATT) has also welcomed the changes to CGT during divorce proceedings.

John Stride, vice chair of the ATT steering group, said:

"We are pleased the proposals extend the amount of private residence relief available to the departing spouse.

"Under the proposed rules, from 6 April 2023, a departing spouse who has transferred their share to the remaining spouse will have a more realistic chance to make a no gain, no loss disposal thanks to the longer time limits.

"Where the property is sold to a third party, further specific exceptions are also proposed, which will increase the amount of private residence relief and put the departing spouse in the same position tax-wise as if they had not moved out.

"This will help to even up the tax position on a shared residence for a divorcing couple."

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