The Government has announced that it intends to give divorcing couples and those dissolving a civil partnership a capital gains tax (CGT) lifeline, allowing them to transfer assets without incurring an immediate CGT liability for up to three years from separation and potentially longer. At the same time, the Government have also announced potential changes to Private Residence Relief (PRR) for divorcing couples.
These changes are proposed to come in for disposals that occur on or after 6 April 2023, but it remains to be seen whether the proposed rules will apply to couples already involved in divorce proceedings.
Capital Gains Tax as it stands
During marriage couples and civil partners can transfer assets between themselves at any point free from CGT. However, this generally stops at the end of the tax year (5 April) when the parties separate, at which point transfers between the parties, including the family home, could attract CGT. This can represent a sizeable tax bill, with a rate of tax up to 28%, at a time when individuals are already under significant financial strain.
To add further complication, that tax bill usually needs to be settled within 60 days of the transfer. An individual has, quite literally, days to settle what can be a significant tax bill, at a time when financial resources have already been depleted. Indeed, there may not even be any cash available.
The pressure is compounded if the family home is retained to house the children. This currently leaves the spouse who has moved out facing an even higher tax liability on the ultimate sale or transfer. The proposals aim to address this issue too.
These proposals from the Government will be a welcome change, giving divorcing couples up to three years from separation in which to transfer assets without triggering a CGT liability. It represents one of the most significant changes to taxation affecting divorcing couples for some time, and one that will be enormously welcome, especially with mounting financial pressure from the cost of living crisis. Whilst the rules will not change the obligation to pay capital gains tax when the asset is eventually sold, they will, in effect, allow more time to pay.
The current harsh timescales continue to needlessly add to the significant pressure upon divorcing couples and these proposals will thankfully alleviate this. There are, however, unanswered questions, such as whether these changes will apply only to those who separate after the legislation comes into effect, or apply retrospectively to couples who have already separated. Until the legislation comes into effect, couples will need to think long and hard about whether they should delay their divorce, which is not going to be an easy decision.
We would urge the Government to carefully consider the wording of the final legislation to allow couples that have already separated to benefit from these changes.
In one example we've come across, a client's husband started the divorce proceedings without taking into account the current tax rules. which will result in a tax bill of over £400,000 having to be paid immediately. This means that some of the assets she was hoping to leave to the children will now have to be sold to pay the tax. This situation would not arise under the proposed changes.
PRR is a relief from CGT which applies to your main residence and often provides that no CGT is due on its sale. As it stands, where a spouse moves out of the family home, they are often no longer eligible for this relief. This can cause a significant future tax liability if the main home is being retained for a significant period, say until the children have reached a certain age.
The Government are now proposing to give the spouse who leaves the family home, but retains an interest in it, the ability to elect for that property to continue to be their main residence. This may also apply to Court orders where the property has been transferred entirely to the spouse, but the leaving spouse is entitled to receive a percentage of the proceeds on a sale.
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