Under current rules, couples can transfer an asset at “no gain or no loss” meaning no capital gains tax is payable immediately. However, couples can only take advantage of a “no gain or no loss” agreement in the same tax year as their separation. Due to the speed of property transactions, this leaves a very small window to conclude the necessary negotiations.
In reality, there simply isn’t enough time to take advantage of the rule, meaning tax will need to be paid upfront. During the Treasury’s review of capital gains tax this was an area that was identified as needing reform.
What are the new capital gains tax rules?
From 6 April 2023, separating spouses and civil partners will be allowed three tax years to transfer assets on a “no gain or no loss basis”. These new rules mean that, if a couple separates during or after April 2023, they will have nearly four years to make these transfers.
The benefits go further, as the “no gain and no loss” rule is extended indefinitely if an asset is transferred between a couple as part of a “formal divorce agreement”. So, if a couple has a financial settlement included in a court order, there is no time limit for a “no gain or no loss” transfer. In reality, this could extend the tax-free window for many years.
Interestingly, the new rules could help couples who are already separated, but have yet to make a financial agreement. They just need to wait until 6 April passes.
How do the rules affect a family home?
The new rules also make significant changes to the tax treatment of the family home. Until now, main residence relief (MRR) has not automatically been available to both parties involved in a separation.
For example, a couple may jointly own the family home, but when one spouse moves out they could still be liable for capital gains tax when the property is sold. The new rules make it clear that the spouse who has left the family home retains the option to claim MRR.
Furthermore, if jointly owned family home is transferred into one spouse’s name, but the transferring spouse still retains an interest in it – they will be due a percentage of the sale proceeds. This could be many years later when the children have grown up and moved out. The transferring spouse has access to the same tax treatment as the time when the property was originally transferred. They are not penalised for the delay.
Need advice?
If you have a question about capital gains tax, our friendly team provides a full range of tax planning and business advisory services. Call us on 01462 687333 or email letchworth@uhy-uk.com.
