Asset transfer proposals to benefit separating couples.

Changes in the treatment of asset transfer on divorce could ease capital gains tax issues for parting couples.

For many couples, when the chips are down and divorce is the only card left to play, tax planning is unlikely to be top of the priority list.  Failing to transfer assets at the right time however may result in unexpected charges for capital gains tax, diminishing much-needed capital.

As it stands, when couples first separate, transfers and disposals made during the current tax year can be on a ‘no gain, no loss’ basis.  Matters may become complex and could involve tax charges on the spouse or civil partner who is transferring the asset however, once outside of that first tax year.  The likelihood of this is increasing, with financial matters becoming increasingly complex, and many divorces taking longer to conclude as a result. Even with the best intentions and swift agreement between separating couples, it still is challenging to conclude financial matters before an April deadline.

The Office of Tax Simplification has recognised that couples going through the trauma of separation do not usually consider the tax implications and timing of asset transfers. It has therefore recommended that the tax rules be updated to reflect a fairer and more modern approach to separation and divorce.

In response, the Government is proposing to introduce legislation to change the rules for disposals that take place on or after 6 April 2023.   The proposed changes would extend the window of ‘no gain, no loss’ transfers and disposals to three tax years after the end of the tax year of separation, or where there is a formal Court Order with no time limit.  

The benefits of this should be :-

1. To afford greater opportunity to those who should seek specialist legal and tax advice.

2. To remove any risk of there being unwelcome and possible unexpected tax bills, especially when tax may need to be paid but no cash has been realised to do so.

3. To provide further and much needed flexibility.

Provisions within the Taxation of Chargeable Gains Act 1992 cover the tax position when spouses live together, and when they dispose of assets on divorce.  While these provide for some relief from capital gains tax, including on the primary marital home, the circumstances are limited and can be inflexible in the reality of current-day divorce.

One example is in the different approaches to dealing with jointly owned property.  With house prices continuing to rise, and with affordability in mind, more couples are agreeing to retain the family home, delaying its sale, until the children of the family reach majority. This is with a view of ensuring security of housing for the children and to avoid unsettling them.

The proposals would help in this situation, provided the arrangements are in accordance with a Court approved agreement. If so, an ex-spouse or civil partner would be entitled to receive the same tax treatment on any proceeds in the future, as they would have received if the property had been sold or transferred at the time of the separation. 

A close eye will be kept on the progress of the proposed reforms. For some, it may be beneficial to intentionally delay some asset transfers until the proposed new rules take effect.