The Government has released draft legislation which will ease the tax rules for many divorcing couples from April 2023. The changes follow recommendations made by the Office of Tax Simplification (OTS) in May 2021.
What are the proposed changes to tax rules regarding divorce?
Married couples and civil partners can transfer assets such as property, shares or business interests between them without incurring capital gains tax (on a ‘no gain, no loss’ basis). However, under the current rules, when a couple separate they can only benefit from this treatment until the end of the tax year in which the separation occurs. For example, a couple that divorced in March 2022 could only transfer assets without incurring tax up to 5 April 2022. If a transfer is made after the tax year of separation, this could result in unwelcome capital gains tax charges.
Craig Walker, Tax Director at Hawsons, commented “The proposed changes are welcome and sensible. They will provide many divorcing couples who are going through a stressful time with an extended time period of up to three tax years to transfer assets such as their home without triggering tax. It can take time to agree a split of assets and this relaxation will reduce the time pressure for couples”
What are the changes to the tax rules regarding divorce?
The changes announced will allow divorcing couples longer to arrange their affairs. From 6 April 2023, couples will have up to three tax years from the year in which they separate to transfer assets on a no gain, no loss basis. If the transfer is made as part of a formal divorce agreement, the couple have potentially an unlimited period to benefit from this treatment.
The changes will benefit a spouse who has moved out of the property before it is sold, or transferred to the remaining spouse. Under the current rules, the departing spouse is no longer able to accrue private residence relief once they have moved out and this can result in a capital gains tax charge on the eventual sale or transfer of the property if they have been absent from the property for some time. The proposed extended time limits will give the departing spouse a more realistic chance to make a no gain, no loss disposal. Further specific exceptions are also proposed which will increase the amount of private residence relief that is available where the property is sold to a third party.
What if the couple divorce prior to 6 April 2023?
Couples who divorce in the 2022/23 tax year will be able to benefit from these new rules if enacted. Any transfers prior to 5 April 2023 (i.e. in the tax year of separation) will already be on a no gain, no loss basis and the new extended time period will apply to transfers made on or after 6 April 2023.
Unfortunately, couples who divorce prior to 6 April 2022 will only benefit if they are prepared to defer their transfer of assets until after 6 April 2023 and this may not be appropriate or even possible depending on what stage of the divorce process they have reached.
Will this change benefit couples who have not been married or entered a civil partnership?
These changes will only help couples divorcing 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 no gain no loss treatment.
At Hawsons we have a dedicated team of tax experts at our offices in Sheffield, Doncaster and Northampton.
If you would like advice on the tax implications of separation or divorce please do not hesitate to contact us.
We offer a free initial meeting to discuss your particular circumstances – contact us to arrange your free initial consultation.
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