Kevin Read explains proposed changes to the capital gains tax rules for separating spouses.
Separation is a very stressful and expensive time. Overlooking the tax rules can make it even more costly. Happily, Finance Bill 2023 is to make changes that will allow separating couples more time to arrange asset transfers without triggering capital gains tax (CGT) bills. It is also making amendments to the principal private residence (PPR) relief rules on separation.
Separation, not divorce
The legislation (TCGA 1992, s 58) deals with no gain/no loss (NG/NL) transfers between spouses (where the recipient takes over the CGT cost of the transferor).
Currently, NG/NL transfers are only available where you have been married and living together in the tax year. This means that you cease being regarded as married from the end of the tax year in which you permanently separate, giving relatively little time (particularly if you separate late in the tax year) to organise asset transfers without triggering CGT charges.
Separated but connected
Transfers after the end of the tax year of separation are at market value, as the couple remain ‘connected persons’ for CGT purposes until an actual divorce. This means that:
- gains on inter-spousal transfers will be chargeable (with holdover relief only available for ‘business assets’, as defined in TCGA 1992, s 165); and
-
any capital losses will be ‘clogged losses’, only available to set off against gains on disposals to that spouse in the future.
Extension of NG/NL window
Finance Bill 2023 is taking up a recommendation of the Office of Tax Simplification and amending the above rules. The window for making NG/NL transfers is extended to the earlier of:
- three years following the end of the tax year of separation; and
-
the date of divorce.
This will be effective for transfers from 6 April 2023, irrespective of the date of separation. Also, transfers as part of a formal divorce settlement will take place at NG/NL.
Example: Anne and Kate split up
Anne and Kate had been married but separated permanently on 26 October 2021. They are trying to split their assets as fairly as possible.
Any asset transfers up to 5 April 2022 will have been NG/NL but any in 2022/23 will be at market value. However, for disposals after 5 April 2023 the new rules apply, so transfers in 2023/24 and 2024/25 (which are within three years of the end of the tax year of separation) will once again be NG/NL unless the couple divorce earlier.
Departing spouse retaining an interest in the family home
Currently, the departing spouse can continue to treat their absence from the property as a period of deemed occupation (TCGA 1992, s 225B), provided that:
- the property continues to be the only or main residence of the other spouse; and
-
the departing spouse does not have another property that qualifies for principal private residence (PPR) relief (e.g., they move into rented accommodation).
From 6 April 2023, the departing spouse will be able to elect for their retained interest in the former matrimonial home to continue to be eligible for PPR relief instead of another property that is simultaneously eligible for relief.
PPR relief for gains on deferred consideration
When one spouse transfers their share of the matrimonial home to the other on divorce, they often retain a right to a share of the proceeds when the property is eventually sold.
Under a further proposed change, the departing spouse’s gain on disposal of that right (i.e., when the subsequent sale proceeds are received) will qualify for PPR relief to the extent it was available on their original disposal.
Practical tip
Where couples separated in 2020/21 or 2021/22 (see Anne and Kate above), it may be sensible to postpone any transfers they were planning before 6 April 2023 until the new tax year.
