There stands to be important changes to Capital Gains Tax (CGT) on divorce following the recent publication of a Government policy paper.
Changes to Capital Gains Tax on divorce
The Government has recently published a policy paper that stands to significantly improve the treatment of Capital Gains Tax for spouses and civil partners who are in the process of separating.
What are the existing Capital Gains Tax rules?
At present, when a married couple or civil partners separate, they only have the period through until the end of the tax year in which they separate to transfer chargeable assets between them for no gain/no loss. This defers any charge to CGT. By chargeable assets, we mean any assets that attract a charge to CGT, such as property, shares, business assets and some personal possessions, amongst other things. Transferring those assets prior to the tax year end in which the couple separate can often save significant amounts in tax.
What is the issue with the existing Capital Gains Tax framework
The existing rules present major problems for many couples separating towards the end of a tax year (i.e. immediately prior to 5 April), and those who had separated earlier in the tax year but didn’t know about the tax savings that could have been made from transferring assets earlier. Steps can be taken to mitigate tax if sufficient time is left prior to the tax year end, however it does require the couple’s agreement. Unintended tax consequences can arise solely as a result of the date a couple decide to separate. It can be significantly expensive for the couple and reduce the number of settlement options available to them.
What are the new changes proposed?
In place of the deadline of 5 April after the date of separation for no gain/no loss transfers of assets, the Government is proposing to extend the window to three years from the date of separation. The proposal is extended to an unlimited period of time if the assets are the subject of a formal divorce agreement.
When are the changes due to come in?
The changes are proposed to apply to disposals on or after 6 April 2023. Whilst these are only proposals at this stage, all commentary would suggest that the changes are significantly likely to be made within the Finance Bill 2022-23.
What should you be thinking about now if you separated prior to 5 April this year?
Married couples or civil partners who separated prior to 5 April this year and have assets that will need to be transferred between themselves (either joint assets to either party or solely owned assets to the non-owning spouse) might consider deferring those transfers until after the end of the current tax year, in the hope that the proposals outlined in the policy paper become law.
If these couples have already agreed a settlement and are drawing up their Consent Order now, they need to take care to ensure that the mechanism included in the order for transferring assets between them is tax efficient and pays adequate regard to the potential changes. It is quite possible that deferring the transfers until the next tax year could, under these proposals, save what might otherwise be a significant capital gains tax charge.
What should you be thinking about if you separated or are planning to separate in the current tax year?
Married couples or civil partners who may have separated or are planning to separate in the current tax year may have the certainty of the existing no gain/no loss rules and until 5 April 2023 to transfer assets between themselves free of any CGT charge. Until the proposals are confirmed as law, it may still be sensible to rely on the current window.
If enacted, these changes will bring about a much-needed reprieve for many clients who would otherwise be facing the threat of unintended tax charges in April each year. It’s hard to overstate the significance of these changes for HNW divorcees.