Putting the brake on break-up taxation

The Office for Tax Simplification proposals in respect of extending the period for which transfers of assets between spouses and civil partners (referred to jointly as spouses for brevity from here on in) can benefit from no gain, no loss treatment are in the draft Finance Bill 2023. If enacted, transfers that take place from 6 April 2023 will benefit from this treatment.

Currently couples who are married or who are in civil partnerships and are co-habiting can transfer assets between themselves without triggering a gain for Capital Gains Tax (“CGT”) purposes, the so-called no gain, no loss treatment. This means that the receiving spouse is deemed to have acquired the asset at the giving spouse’s original cost for tax purposes. When a couple divorces or separates, this relief extends to the end of the tax year of separation.

Of course, when a couple separates one of the things not at the top of their minds is tax, so it’s only after the trauma of separation has been gone through do such mundane matters take more prominence. This is often after the end of the tax year in which separation occurred. Typically, financial settlements take place alongside divorce proceedings and usually decree absolute is not granted until everything else is settled, including the couple’s finances. Whilst a couple is still married or civilly partnered they are connected persons for tax purposes, meaning that any asset transfers between them are deemed to take place at market value. Thus assets transferred in a financial settlement can lead to tax being payable.

The proposed legislation extends the period for reaching a financial settlement and making asset transfers tax-free to up to 3 years from the end of the tax year of separation and beyond that, if the settlement is part of a formal divorce agreement.

The draft legislation also includes proposals that extend relief in respect of the family home, or main residence. Currently, where a spouse has been absent from the family home since separation, Principal Private Residence Relief (PPRR) that exempts gains made on the main home from tax does not apply to the period of absence. This can lead to tax charges arising on the transfer of interests between spouses or on sale. The transfer between spouses issue has been dealt with by the proposals outlined above, but in future a spouse who retains an interest in the former matrimonial home will be given an option to claim PPRR when it is sold.

In some financial settlements individuals transfer their interest in the former family home to their ex-spouse and become entitled to receive a percentage of the proceeds when that home is eventually sold. Under the intended new rules they will be able to apply the same tax treatment to those proceeds when they receive them to that which would have applied when they transferred their original interest in the home to their ex-spouse. 

The next step

All in all, the proposals make a lot of sense and should take a little of the anxiety out of the divorce process. If you have any concerns about the financial side of divorce or separation, contact John Sheehan or your usual UHY adviser. 

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