An update on our separation
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Following finalisation of the latest Finance Act, separating or divorcing couples have longer to transfer assets between them without capital gains tax consequences. This is a welcome measure that takes some of the time pressure off deciding a split of assets.
Spouses can transfer assets between them on a ‘no gain, no loss’ basis for capital gains tax purposes, which means that no capital gains tax is payable on transfer. Instead, the spouse receiving the asset takes on the other spouse’s base cost. Upon separation, however, this rule only applied up to the end of the tax year of permanent separation.
Following changes to legislation announced at the Spring Budget 2023, the spouse rule is now extended. Couples have 3 years after the end of the tax year of separation to make no gain no loss transfers, and there will be no time limit if the assets are transferred as part of a formal divorce agreement. This applies to disposals on or after 6 April 2023.
The changes also extend the availability of private residence relief (PRR) on the eventual sale of the matrimonial home to a third party, provided specific conditions are met. Previously, this was only available when the departing spouse transferred their interest to the remaining spouse.
Individuals will also be able to transfer their interest in the former matrimonial home to their ex-spouse, in return for a share of the proceeds on the eventual disposal (‘deferred proceeds’). PRR will apply to those future proceeds on the same basis as the original transfer. Under the previous rules, the deferred proceeds were treated as a separate asset and CGT would be payable on any growth in the value of the property arising between the transfer and the eventual sale.
The changes will provide divorcing couples with more time and flexibility to arrange their financial affairs under the settlement. Although these changes are welcome, it is still important to consider capital gains tax consequences as part of a divorce settlement, as the ‘no gain, no loss’ rule does not eliminate the inherent gain within the asset. Spouses will still need to consider the ‘net of tax’ position of any assets received as part of the divorce, in order to understand the actual value of their divorce settlement, In addition to this, if a non-occupying spouse chooses to extend the availability of PRR on the matrimonial home and has acquired another property to reside in, they will need to consider any potential exposure to capital gains tax on this new property.
Approval code: NTAJ14082351
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.
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