Meg Saksida explores the potential amendments to capital gains tax principal private residence relief.
The current rules on legal couples separating and divorcing for capital gains tax (CGT) purposes are that in the tax year their separation becomes permanent, the CGT relationship between the couple remains as the beneficial ‘no-gain/no-loss’ calculation that they had whilst married or in a civil partnership. After the tax year of separation, the relationship converts to ‘connected parties’ and once they are divorced, they are simply two separate people. ‘Connected party’ transactions require market value to be used for proceeds while calculating the gain, even when proceeds are below market value (or nil).
This can put a strain on couples that permanently separate close to the end of the tax year, as they may have only weeks to organise transfers of assets between each other to prevent GCT liabilities and ‘dry’ tax charges; and you can bet tax is not on their minds at this time.
‘No-gain/no-loss’ rule extension
In the second CGT report (issued by the Office of Tax Simplification) entitled ‘Simplifying practical, technical and administrative issues’, it was recommended that the ‘no-gain/no-loss’ window be extended to either the end of the tax year at least two years after the separation event or another reasonable time when the financial agreement is approved by a court (or equivalent process in Scotland) if later. The government responded to this on 30 November 2021 and agreed to the extension. They have now issued draft legislation to facilitate this.
The draft legislation allows a much longer time for the ‘no-gain/no-loss’ treatment between separating couples. If the couple is subject to a formal divorce or dissolution agreement, the no-gain/no-loss basis can be used right up until the divorce is final without restriction. In all other cases, the new time limit is three years after the end of the tax year in which the divorce or dissolution becomes final. The draft legislation is due to affect disposals on and after 6 April 2023.
Example: Separating couple
A couple in a civil partnership separate on 16 January 2024. Under the old rules, they would have just under 12 weeks to finalise their asset transfers to obtain no-gain/no-loss treatment prior to the end of that tax year.
However, post-April 2023, they have no-gain/no-loss treatment up to and including 5 April 2027.
‘Departing spouse’ extension
Complications occur with main residence relief, as this is a joint relief shared by both spouses. If a legal partner leaves the family home, they will continue to get main residence relief on the home if the period between the date they left and the date of the disposal of the home was within the final nine months. If it is longer than this, it is only available if:
- The ex-spouse or CP remains living in the home;
- The home is transferred to one of the spouses or CPs;
-
The departing spouse has not nominated another home for their main residence.
The new legislation allows the home to be disposed to anyone, allowing the departing spouse to retain the ability to claim principal private residence (PPR) relief even when the home is not transferred to one of the couple. As a result of the no-gain/no-loss extension, if the couple wished to transfer the property between the two of them, this should be possible anyway, in the three-year period mentioned previously.
The departing spouse may also make an ‘initial disposal’ by transferring their share of the family home to the remaining spouse, but rather than in exchange for immediate proceeds, for deferred proceeds inside a ‘deferred sale agreement order’. This means that the eventual proceeds are received once the remaining spouse disposes of the residence in the future. Any increase in the value of the proceeds will also be covered by PPR relief.
Practical tip
If the couple needs cash, they may need to make disposals to third parties. These disposals will still attract CGT and must be factored into the finances.
