ATT welcomes easing of tax rules for divorcing couples

Married couples and civil partners can transfer chargeable assets such as property, shares or business interests between them without incurring capital gains tax under what is known as a ‘no gain, no loss’ process. But when they separate, the current rules only allow the couple to benefit from this treatment until the end of the tax year in which separation occurs. This means that a couple that separated in February 2022, for example, could only transfer assets without tax up to 5 April 2022. After that, transfers of property and assets could result in unwelcome capital gains tax charges.

The Government has today released draft legislation which will allow divorcing couples longer to arrange their affairs. From 6 April 2023, couples will have a more generous window of up to three tax years from the year in which they separate to transfer assets on a no gain, no loss basis – and essentially an unlimited period if the transfer is made as part of a formal divorce agreement.

Jon Stride, Vice Chair of the ATT Technical Steering Group, said:

“The proposals will benefit many divorcing couples. It can take time to agree a fair split of assets and the current rules operate in an unfair and inconsistent way. Taking capital gains tax out of the equation in many cases will reduce the time pressure for couples who are trying to agree a fair split of assets.”

‘Not all will benefit,’ warns ATT

In terms of timing, couples who separate in the current 2022/23 tax year should be able to benefit immediately from these new rules (assuming they are enacted) as any transfers prior to 5 April 2023 will already be on a no gain, no loss basis, and the new, extended time period will then apply to any transfers made on or after 6 April 2023.

For couples who separated prior to 6 April 2022, they will only benefit if they are prepared to defer their transfer of assets until after 6 April 2023 – which may not be appropriate for their circumstances, or even possible depending on what stage of the divorce process they have already reached. Couples who divorced a few years ago will similarly only benefit if any transfers are made after 6 April 2023 as part of formal arrangements which have not already been concluded.

It should be noted that these provisions will only help couples separating following the breakdown of a marriage or civil partnership. Couples who have not been married or entered a civil partnership do not have access to the same no gain, no loss provisions.

The changes will though benefit those whose main asset is their home, particularly where one of the spouses has moved out of the property before it is sold, or transferred to the remaining spouse. As it stands, the departing spouse is no longer able to accrue private residence relief once they have moved out, and this can mean a capital gains tax bill on the eventual sale or transfer to the remaining spouse if they have been absent from the property for some time.

Jon Stride said:

“We are pleased the proposals extend the amount of private residence relief available to the departing spouse. Under the proposed rules, from 6 April 2023 a departing spouse who has transferred their share to the remaining spouse will have a more realistic chance to make a no gain, no loss disposal thanks to the longer time limits. Where the property is sold to a third party - or they have agreed to receive deferred consideration on a future sale following a transfer to the other spouse - further specific exceptions are also proposed which will increase the amount of private residence relief and put the departing spouse in the same position tax wise as if they had not moved out. This will help to even up the tax position on a shared residence for a divorcing couple.”

Notes for editors

1. An HMRC policy paper Capital Gains Tax: transfers of assets between spouses and civil partners in the process of separating was published on 20 July 2022.
2. The changes follow recommendations from the OTS made in May 2021. The ATT gave verbal evidence to the OTS about their concerns, followed by a written submission.