From 6 April 2023 married couples and civil partners who are divorcing will no longer need to settle their estates within the current short window of the tax year in which they separate, known as ‘the year of permanent separation’.
The change means that civil partners or spouses who separate will have up to three years after they cease to live together to make ‘no gain’ or ‘no loss’ transfers of assets, and unlimited time when the assets are the subject of a formal divorce agreement.
The aim of the legislation is to make it a fairer process for couples who are separating or divorcing and are distributing assets between themselves. It will be of particular benefit to couples whose affairs are more complex.
As HMRC says, “this measure makes fairer the Capital Gains Tax rules that apply to spouses and civil partners… it gives them more time to transfer assets between themselves without incurring a possible charge to Capital Gains Tax”.
Over the last couple of years, the pandemic and resultant lockdowns put a huge financial and emotional pressure on many people, not least of all married couples. The number of people enquiring about divorce rose substantially during this time.
The pressure on families continues as assets and incomes fluctuate with the war in Ukraine, and rising fuel prices and energy prices having a knock-on effect on property and cost of living, making it more difficult to divide assets equally and fairly.
Volatility in equity markets continues and the various crises have also hit dividend income which may have a knock-on effect on pension income or maintenance awards. As pension pots are usually the second most valuable asset in a split, the volatility could have a big impact on any settlement.
The new legislation will be introduced in the Finance Bill 2022-23 and will be subject to confirmation at Budget 2022. It will provide that:
- Separating spouses or civil partners 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 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 (this is a new tax concession)
- 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, 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.
These changes will allow separating and divorcing couples to come to more considered agreements over assets and disposals, however it remains a complex area where taking tax advice is essential to understand tax implications and to prepare for tax liabilities.
Another important legal change has already come into play: on 6th April 2022 new divorce laws came into effect in England and Wales with the introduction of the ‘no fault’ divorce which means married couples and civil partners can now dissolve their unions in a more straightforward and faster manner.
The government’s policy paper ‘Capital Gains Tax: separation and divorce’ can be found here.
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If you need help with any tax-related issues, contact us on 01761 241 861 or firstname.lastname@example.org or make an appointment to visit us at our Somerset or central London office.