Changes to tax rules between spouses April 2023
Under the existing tax rules, a transfer of assets between former spouses or civil partners is made on a ‘no gain or no loss’ basis as long as said transfers take place in the tax year in which the former spouses or civil partners separated, thus any gains or losses from the transfer are delayed until such time that the asset is sold.
However, if the transfer takes place after the tax year in which the spouses separated it is treated as a regular disposal and will be subject to Capital Gains Tax (CGT) in the usual way.
The new rules which relate to transfers which occur after 6 April 2023 will allow for a lengthier period of the ‘no gain, no loss’ rule for up to three years after the year spouses cease to reside together.
Also, the ‘no gain, no loss’ rule will also now apply to assets that are transferred between spouses as part of an order on divorce without a time limit.
Situation 1
A married couple separated in June 2021, being the 2021/22 tax year. They agree that the wife will transfer to the husband her interest in an investment property that they jointly own.
If this transfer occurs in the same tax year in which they separated, then it will not be subject to any CGT further to the ‘no gain, no loss’ rule.
If this transfer of the investment property happens in the following tax year, the following tax year being 2022/23, it will be subject to normal CGT rules based on 50% of the market value less the wife’s 50% share of the purchase costs and accompanying legal fees.
However, if the transfer is deferred and does not occur until after the new rules are applied in April 2023, then it will be subject to no CGT under the new prolonged ‘no gain, no loss’ rule, and the husband will be taken to have received the asset at the original purchase cost.
The above situation will apply to married couples or those in civil partnerships who separated from April 2019 onwards, for the reasons that the new rules will benefit transfers within three years of a separation.
Situation 2
A married couple separated in February 2018. Unfortunately, they could not agree on the division of assets, and so, they decided to instruct legal representatives to issue applications at Court, which leads to lengthy delays. If their matter fails to settle until after April 2023, then the new tax rules will then be effective and any transfers made between them will be conditional on the ‘no gain, no loss’ rule.
Situation 3
A married couple separated in August 2022. Harmoniously, they broker a financial agreement after the application of the new rules (the husband will remain in the former family home and the wife will transfer her interest to him. The wife is to get a 45% share in the proceeds of sale when the house is sold. Consequently, the wife will be permitted to have her CGT Private Residence Relief remain despite the fact that she did not reside in the former family home at the time of its sale.
The CGT consequences of property division on separation or divorce is a complicated area to get to grips with. That being the case, do not delay on getting the right legal advice. Please contact our Family Department here at Adams Harrison on 01799 523441 (Saffron Walden), 01440 702485 (Haverhill), or 01223 832939 (Sawston). [email protected].
