A transfer of assets between spouses or civil partners living together is usually on a “nil gain / loss basis” for Capital Gains Tax (‘CGT’) purposes. This means neither a gain nor loss arises for the transferor and the recipient is treated as having acquired the asset at original cost. This applies regardless of whether any actual consideration was paid by the recipient.
Currently, this favourable treatment applies only up to the end of the tax year of permanent separation. From the following tax year, the individuals remain connected persons until divorce or the civil partnership is dissolved, so any transfers of chargeable assets between them are deemed to take place at open market value. This could result in “dry tax” charges, whereby a transferor may have CGT to pay, but no actual cash proceeds.
In May 2021 the Office of Tax Simplification (‘OTS’) recommended that the government should make the CGT rules on separation fairer by extending the nil gain / loss window beyond the tax year of permanent separation. This would give separating spouses and civil partners more time to transfer assets without incurring CGT liabilities.
The proposed rules in the draft legislation to be included in the Finance Bill 2022/23 should apply to disposals on or after 6 April 2023. This would mean separating spouses or civil partners will be able to make transfers between themselves on a nil gain / loss basis for:
- Up to three tax years after the tax year in which the couple ceases to live together; or
- An unlimited period where the transfers are made in accordance with a formal divorce agreement or court order.
This relaxation of the rules will provide more time and flexibility for those going through the complex and emotional issues of divorce.
In addition to the relaxation of the rules above, a spouse or civil partner who retains an interest in the former matrimonial home will be given an option to claim Private Residence Relief (‘PRR’) when the property is sold, even if they no longer occupy it.