At the end of July 2022, government draft legislation announced an extension to the period of time in which a couple can transfer assets without incurring Capital Gains Tax (CGT), after having filed for divorce or dissolution of civil partnership. It is a welcomed change that will come into effect from the beginning of the next tax year (April 6 2023) if enacted.
What was the law before?
Previously, married couples and civil partners only had until the end of the tax year in which they were divorcing to manage the distribution of the finances under the ‘no gain, no loss’ legislation. This meant the constant threat of a tax bill looming just months, or even weeks away during what can be one of the most emotionally challenging periods of a couple’s life.
What is changing?
From next year, if the proposed legislation is enacted, the HM Revenue & Customs policy paper states that divorcing couples will have up to three years to transfer assets such as property, shares and business interests under the neutral tax break of ‘no gain, no loss’. This can further be extended to an unlimited period of no CGT, where transfers are made in accordance with a formal divorce agreement, or with a court order.
It is possible that persons who have already divorced but retain a joint interest in property, for example, the matrimonial home, will also benefit.
During this challenging period of emotional grief and uncertainty about the future, a short and firm deadline in which to complete the distribution of assets is an additional burden. Not only does it heighten the psychological tribulations for the individuals involved, but many couples with a sizeable base of assets have been opting to delay the divorce by a number of months (if, for example, they were to begin the process in January, February or March), so as to be granted with an additional 12 months from 6 April to arrange their affairs. This is also true for couples whose assets are limited to one family home and one or the other party has moved out. It is clear that it should not be the case that couples are having to base the timing of their divorce around the tax year.
Efficiency, accuracy and patience are key factors in ensuring the divorce process runs as smoothly as possible. These are positives that may be granted as a result of the potential change in legislation as there may now be a longer period of time within which to seek financial advice, and to agree on the division of assets within the marriage.
Are there any other changes to the legislation?
Other changes to the legislation include:
- The option for Private Residence Relief for both the spouse or civil partner that retains a financial interest in the former marital home and has moved out.
- Equal tax treatment for the individual who transfers their interest in a property to a former spouse or civil partner upon the sale of the property, as when the interest is transferred between spouses or civil partners.