New rules on how CGT impacts separating spouses and civil partners have been finalised and will come into effect on 6 April 2023. B P Collins’ family team believes that the changes should take some pressure off couples who have assets they may wish to transfer between them following a separation.
Current rules
Currently, separating spouses and civil partners can transfer assets between them on a “no gain or no loss” basis only during the tax year in which they separated. This is a very small window of opportunity which can cause some frantic negotiating and planning to try and make the deadline, but most often it is simply not possible to be ready in time and the benefit of the rule is lost. At a time when every penny is often needed, there may then also be a problem in actually raising the cash needed to pay the tax.
Transferring an asset at “no gain or no loss” means that any gains or losses arising on a transfer are not crystalised at the time of transfer. The asset is transferred, and no CGT is payable. The CGT is ‘dormant’ and only comes into play when the asset is finally sold (or disposed of) by the recipient spouse – which could be many years in the future. The potential liability should not be ignored in the couple’s financial settlement, but the changes essentially mean that when the transfer happens, the recipient is taking on the full value of the asset, and the full burden of any CGT already due and any which may accrue further in the future.
For example, a rental property owned jointly by a husband and wife, which has doubled in value since they bought it, could be transferred from their joint names into one of their sole names without giving rise to a CGT charge at the time of transfer. Instead, all the CGT will be paid in the future when the recipient spouse sells the property.
New rules
From 6 April 2023, separating spouses and civil partners will now have 3 full tax years to make transfers on a “no gain or no loss basis”. Thus if a couple separates on 7 April 2023, they will have virtually 4 years to make transfers: the remainder of the 2023 tax year, and the three subsequent tax years.
Unlimited Time for “no gain or no loss” transfers
Remarkably, the “no gain and no loss” rule is also extended indefinitely if the asset is transferred between the spouses in accordance with a “formal divorce agreement.” This means that if a couple formally agrees a financial settlement and (ideally) has this made into a court order, there will be no time limit at all for “no gain or no loss” transfers. As an example, a couple could separate on 7 April 2023 but not do anything about their finances for 6 years, then reach a formal divorce agreement under which shares and properties are transferred from one spouse to the other. These transfers would still take place on a “no gain or no loss” basis.
In respect of timing, these rule changes can also benefit couples who are already separated. For example, if a couple separated two years ago, but has not yet got round to resolving the finances, they will still benefit from the new rules, presuming they now hold on for a few more weeks!
The Family Home
The new rules also make significant changes to the tax treatment of the family home.
Until now, Primary Residence Relief (PRR) relief has not automatically been available to both parties on a separation.
PRR of course allows any person (not just spouses or civil partners) to avoid CGT on the sale or transfer of their main residence. For example, if you buy a new home, live in it as your main residence and then sell it ten years later for three times the purchase price, all of the gain will be covered by PRR and you will not have to pay CGT.
This has been more difficult in divorce cases where one spouse has left the family home. A couple might jointly own their family home, separate and one of them move out to rent a flat. Currently, if they then sell the family home a few years later, the spouse who moved out may have a CGT liability. Under the new rules, the spouse who has left should retain the option to claim PRR in relation to the family home.
Finally, changes have also been made where, on a separation, the jointly owned family home is transferred into one spouse’s sole name, but the transferring spouse retains an interest in it – meaning they will be entitled to receive a % of the sale proceeds when the property is eventually sold (perhaps many years down the line when the children become independent). Under the new rules, the transferring spouse will be allowed to apply the same tax treatment to the proceeds when they are eventually received, as applied at the time the property was originally transferred, meaning a parent who agrees to delay the sale of the family home for the benefit of their children should not now be penalised on tax for doing so.
For further information on this issue or any other family matter, please email the family team at enquiries@bpcollins.co.uk or call 01753 279046.
