Will divorce be less taxing from April 2023?

A breakdown in a relationship and divorce is a very stressful time and any proposals to take away from those involved some of the concerns regarding taxation are to be welcomed. 

Currently, divorcing couples only benefit from the no gain, no loss rules that attach to transfers of assets between married couples up to the end of the tax year in which separation occurs. Often, by the time a financial settlement has been agreed, that tax year has long passed, and the spectre of tax arising as one spouse passes an asset to the other has to be dealt with. 

Last year the Office of Tax Simplification (OTS) suggested that the period during which assets could be passed between the members of a divorcing couple should be extended beyond the tax year of separation. The Government responded favourably to this idea in November 2021, but no legislation was forthcoming, and it was suspected that, like many OTS recommendations, no action would be taken as more urgent issues took precedence. It’s therefore pleasing to see this idea in the Government’s legislative programme.

It is proposed that:

  • Separating spouses or civil partners be given three years after the year they cease to live together or up to the date of divorce, whichever is sooner, in which to make no gain or no loss transfers.
  • No gain or no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement. The implication here is that the three-year limit will not apply to formal settlements, although it’s not entirely clear if this is limited to court orders, or whether it extends to other formal agreements. Hopefully this will be clarified as the bill passes through Parliament.
  • A spouse or civil partner who retains an interest in the former matrimonial home be given an option to claim Private Residence Relief (PRR) when it is sold.
  • Individuals who have transferred their interest in the former matrimonial home to their ex and are entitled to receive a percentage of the proceeds when that home is eventually sold, will be able to apply the same tax treatment to those proceeds when received that would have applied when they transferred their original interest in the home to their ex. 

To expand on that last point, often a divorce settlement will require a spouse who has left the family home to transfer his or her interest in the house to the spouse who remains, often with the children, on the basis that the house will be sold when the remaining spouse remarries or the children cease full-time education. The current tax analysis is that the absent spouse transfers his or her interest in the house at the current market value and receives a right in return to receive some proceeds at some uncertain time in the future. The gain that is made will be subject to main residence relief and may give rise to no tax charge, dependent on the occupation pattern of the property. If the share of future proceeds turns out to be in excess of the currently estimated current market value, a gain may be realised and CGT may be chargeable, as the gain relates to the sale of a right to receive a capital sum, not of an interest in a property. The new proposal is that this gain should be subject to the same level of main residence relief as attached to the original disposal.

Tax arising on divorce remains a complex area, but these new proposals will ease the burden on divorcing couples for transfers of assets from 6 April 2023.  For those with significant assets that may need to be shared between spouses, with a target date for the implementation of tax changes announced, a delay in finalising finance arrangements may be a sensible course of action. 

The next step

If you need help in considering the taxation implications of a relationship breakdown, contact John Sheehan.

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