Current law
The current law states that married couples have until the end of the tax year in which they separate to transfer assets between themselves to avoid paying CGT. Once the tax year is over any transfers taking place between the couple are done at market value. This can cause issues due to the amount of time it often takes to resolve the financial issues on divorce.
Changes
The proposed changes are:
- Extending the ‘no gain no loss’ for the whole period providing the couples are transferring assets pursuant to a court order
- Allowing non occupying spouses of the family home to benefit from principal private residence relief on sale
- Providing additional relief for individuals who enter into a deferred charge arrangement over the main home
Extending the ‘no gain no loss’ window to 3 years from the point of separation or for any period provided the assets are transferred pursuant to a court order
The legislation says that no CGT is payable by individuals in cases where the transfer takes place
(c) before the earlier of— (i) the last day of the third year of assessment after the year of assessment in which A and B ceased to live together, or (ii) the day on which a court grants an order or decree for A and B’s divorce, the annulment of their marriage, the dissolution or annulment of their civil partnership, their judicial separation or, as the case may be, their separation in accordance with a separation order.
Therefore, there is an unlimited period of time for couples divorcing to transfer assets between themselves providing the transfer is pursuant to a court order.
b) Allowing non occupying spouses of the family home to benefit from Principal Private Residence relief on sale
At the moment when one party moves out of the family home, if they are out for more than 9 months they will face a CGT charge when they sell or transfer the property. These new rules allow for that individual to claim PPR on the sale even for the periods that they have been absent from the home providing that the sale and absence is due to divorce.
c) Providing additional relief for individuals who enter into a deferred charge over the main home
At the moment when a party enters into a deferred charge over the main home the charge is a new asset for CGT and when the charge is paid the increase in value is subject to CGT. The new rules allow that party to claim PPR relief on that gain and thereby reduce the liability to nil. Therefore if you are keeping an interest in a family home you would no longer have to pay CGT when you receive the money at some point in the future.
Unclear areas?
The legislation is clear that from 6 April 2023 (if enacted as is) couples separating in 2023-24 will have until 5 April 2027 to transfer assets between themselves without incurring any immediate tax liability. What is slightly less clear is what is the position for couples who say separated in Feb 2022? Currently the position looks as though they had until 5 April 2022 to benefit from the ‘no gain no loss’ rules under current law but if they wait until 6 April 2023 they will then benefit from the new rules and can again transfer assets without incurring immediate CGT