Capital Gains Tax: transfer of assets between separating spouses and civil partners
Couples that are currently going through a divorce and considering transferring assets between them could avoid an unexpected Capital Gains Tax (CGT) bill from 6 April 2023, following recently announced tax changes that is likely to be introduced in the Finance Bill 2022/23.
Under the current legislation, when spouses or civil partners separate, the CGT exemption for spouses and civil partners is only available in relation to disposals that take place in the remainder of the tax year in which the separation occurs.
After that, transfers are treated as normal disposals for CGT purposes, with the market value of the asset being transferred being used as the proceeds in the CGT calculation. This often means that by the time a divorce or dissolution of a civil partnership has been finalised, CGT liabilities can arise when assets are transferred.
The recently proposed amendments for disposals on or after 6 April 2023 bring in a much more favourable tax treatment, where the separating spouses or civil partners will be given:
- Up to three tax years after the year of permanent separation to make ‘no gain, no loss’ transfers of assets
- For an unlimited time, ‘no gain, no loss’ treatment will apply to assets transferred between themselves as part of a formal divorce agreement
- An option to claim Private Residence Relief (PRR) when the matrimonial house is sold
- Extended accessibility to PRR. As it stands, where one partner has moved out of the property before it is sold, or transferred to the remaining partner, the departing spouse is no longer able to accrue PRR once they have moved out. This can mean a CGT bill may arise on the eventual sale or transfer to the remaining spouse if they have been absent from the property for some time. Further exceptions are also proposed which will increase the amount of PRR and put the departing partner in the same position tax wise as if they had not moved out.
This provides spouses and civil partners that are in the process of separating valuable time to organise their financial affairs without the added burden of a potential CGT liability arising. This will especially benefit those parties involved in more complex proceedings, as it means that more time can be spent on the divorce considerations, rather than the CGT considerations.
This extension will also help individuals to avoid further depletion of household income or existing accumulated household wealth through dry tax charges for those who meet the new time periods.
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