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Separation can be a difficult time for many couples, and with consideration being given to divorce proceedings, financial negotiations and child care arrangements, most spouses and civil partners are not aware that the timing of their separation and the subsequent transfer of assets could potentially incur an unexpected Capital Gains Tax (CGT) liability.
CGT is a tax on the profit made when you dispose of an asset that’s increased in value. Tax is calculated on the gain, not the money received. In the context of a separation, these disposals will usually take place by way of a transfer or sale of matrimonial property.
This provides that transfers of assets between spouses and civil partners who are living together are made on a “no gain/no loss” basis provided that those disposals are made within the same tax year in which the couple separate.
In effect, couples will only have until the end of the tax year within which they separate to make a disposal of matrimonial property without incurring a potential CGT liability. Thereafter, transfers are treated as normal disposals for CGT purposes.
In 2021, a report by the Office of Tax Simplification (OTS) argued that “it is unrealistic to expect separating couples to have resolved their affairs by the end of the tax year of their separation”.
As a result, the Spring Finance Bill 2023 introduces changes and will apply to disposals that occur on or after 6th April 2023. The relief has not and will not apply to separating cohabitees.
Separating spouses or civil partners will now be given up to three years after the year they cease to live together in which to make no gain/no loss transfers.
No gain/no loss treatment will also apply indefinitely to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement, such as a Consent Order incorporating the terms of a financial settlement or an Order of the Court.
Individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold will be able to claim Private Residence Relief (PRR) when the sale takes place.
These measures are expected to have a positive impact on couples and will especially benefit those parties involved in more complex proceedings, as more time can be spent considering financial negotiations rather than the associated CGT consequences and deadlines.
Furthermore, it may help preserve matrimonial assets as a portion of funds will no longer be required to discharge a potential CGT liability that would have otherwise previously been payable.
If you require further advice regarding matters arising from your separation then please contact a member of our Family Team at either of our Warwickshire (01926 887700) or Leicestershire (01455 610747) offices for a consultation.