In March, HMRC announced a change to the transfer of assets rule which will impact spouses and civil partners who are in the process of separating. The aim is to make the Capital Gains Tax (CGT) rules that apply fairer, by allowing couples more time to transfer assets between themselves without incurring possible CGT charges.
Jannah Furne, Tax Manager explains: “If you are married or in a civil partnership and live with your spouse or civil partner, then any transfer of assets between you will not usually give rise to a taxable gain. For tax purposes, the transfer is treated as taking place at ‘no gain no loss’ whereby the recipient inherits their spouse’s or civil partner’s original cost.”
Out with the old…
Prior to 6 April 2023, the transfer of assets rule extended to the tax year of separation, but only if you lived together at some point in the tax year. This meant that following the year of separation, any transfer of assets would be deemed to take place at market value which may have meant that you were liable to pay CGT – even though no cash has exchanged hands.
… and in with the new
Starting from 6 April 2023, separating spouses/civil partners now have 3 years after the year they cease to live together in which to make a ‘no gain no loss’ transfer of assets between them.
In addition, the ‘no gain no loss’ treatment will apply to any transfer of assets between separating spouses as part of a formal divorce agreement or court order, even if the transfer takes place after the 3 tax years mentioned above.
This provision outlines the importance of ensuring terms of a settlement are drawn up in a legally binding financial order.
What about your matrimonial home?
Private Residence Relief (PPR) may be available on the gain arising on disposal/transfer of the matrimonial home where the property is, or has at some point, been used as your only or main residence.
This has, in the past, exposed the departing spouse to a potential CGT liability on eventual sale of the property as their occupation and ownership periods are misaligned. This liability could be significant for example where, the departing spouse retains an interest in the property and the other party remains in the property for an extended period of time until sale.
From 6 April 2023, the departing spouse who retains an interest in the former matrimonial home has the option to claim PPR when the property is sold. This is on the basis that they do not claim PPR on any other property for the same period. Careful planning will need to be undertaken to ensure PPR is claimed in the most tax-efficient way.
Finally, spouses who have transferred their interest in the former matrimonial home to their ex-spouse/civil partner and are entitled to receive a percentage of the proceeds when the property is eventually sold, will be able to apply the same tax treatment to those proceeds that applied when they transferred their original interest. This means that any reliefs such as PPR that applied at the date they transferred their interest in the property will apply on eventual sale.
Jannah adds: “These changes represent a welcome relaxation of the CGT rules for separating couples. As the government has stated, the new rules will allow more time to be spent on the divorce considerations, rather than Capital Gains Tax considerations. The extension will also help avoid further depletion of household income or accumulated wealth through dry tax charges for those who meet the new time period.”