Tax Improvements for Separating Spouses and Civil Partners
What is capital gains tax?
Capital gains tax is a tax that is payable when you dispose of an asset at an increased value. For example, if you buy a house for £300,000 and you sell it for £400,000, the amount which may be subject to capital gains tax is £100,000 (subject to your annual capital gains tax-free allowance and other permissible deductions).
Parliament has proposed four key changes to capital gains tax legislation. If the proposed changes are approved by Parliament, they will apply from 6 April 2023*. The changes are as follows:
- Separating spouses and civil partners will have up to three years after the year in which they cease to live together to make ‘no gain no loss transfers’;
- Separating spouses and civil partners will have an indefinite period of time to make ‘no gain no loss transfers’ if the relevant assets are subject to their formal divorce agreement;
- If a spouse or civil partner retains an interest in the former matrimonial home, they will have the opportunity to claim Private Residence Relief when the former matrimonial home is sold; and
- If a spouse or civil partner has: (a) transferred their interest in the former matrimonial home to their ex-spouse or civil partner; and (2) is entitled to receive a percentage of the proceeds when the former matrimonial home is sold, they can apply to have their share of the proceeds subject to the same tax treatment.
- A spouse or civil partner who transfers their interest in the former matrimonial to their ex-spouse or civil partner and is entitled to receive a percentage of the proceeds when the former matrimonial home is sold, can apply to have their percentage of the proceeds subject to the same tax treatment that applied when they originally transferred their interest to their ex-spouse or civil partner (i.e. if the value of your interest in the former matrimonial home has increased since you transferred it to your ex-spouse or civil partner, capital gains tax will be calculated on the original sum of your transfer).
What does no gain no loss mean?
The no gain no loss rule applies to spouses and civil partners. It allows spouses and civil partners to transfer assets between themselves without being liable for capital gains tax until the asset is sold to a third party. When the asset is sold to a third party, the selling spouse or partner is treated (for capital gains tax purposes only) as having acquired the asset for the original value when transferring spouse or civil partner acquired it. The following example illustrates how no gain no loss can be useful for separating couples on divorce.
Partner A and B are married. Partner A acquired a painting for £1,000 in 2012 and as of today’s date it is worth £13,300. Partner A has already used up their capital gains tax-free allowance this year (£12,300 for 2022/2023) whereas Partner B has not used their capital gains tax-free allowance. If Partner A sells the painting, capital gains tax will be calculated and payable on the net gain (i.e. £12,300). However, Partner B acquires the painting from Partner A, no capital gains tax will be payable on the sale (£13,300 – £1,000 = £12,300 less capital gains tax free allowance = £0). In doing so, a significant tax burden is removed.
The family department at Russells have extensive experience assisting clients in a wide variety of family and matrimonial matters, particularly where there are complicated tax issues. We work alongside trusted tax advisors who are well placed to advise you. If you wish to contact our family department to discuss your matter, please contact Carol Ellinas, Louise Barretto, Lucy Hoare or Andrew Miles from our family department who will be happy to assist.
*Please note, as the legislation is in draft form, it may be amended prior to 6 April 2023