Associate solicitor Peter Hilton, in our Family Law team, explains the changes relating to to Capital Gains Tax (CGT) on divorce.
The current law
At present, transfers between spouses are considered ‘no gain, no loss’. If an asset is transferred, there is no tax to pay and the receiving spouse obtains the asset from the transferring spouse with the incumbent gains. As a result, when the receiving party comes to sell or transfer the asset, they will pay capital gains tax as if they had been the one to purchase the asset at its original value. From the point parties separate, they have until the end of the tax year to make any transfers without losing their status as connected persons, following which any transfer of assets between separated parties will be subject to CGT in the usual way.
In May 2020 the Office for Tax Simplification published a 125 page report, suggesting that rules for capital gains tax treatment of transfers on divorce should be updated. They suggested that rather than the rules lasting until the end of the tax year of separation, parties should instead have until the end of the tax year two years’ after the date of separation.
If parties were to separate on 4 April in any given year, under the current regime they would have to undertake all transfers within 24 hours or face potential tax liabilities. This is plainly an unfair and rather arbitrary burden, and has led to some parties staying in an unhappy situation for longer than they should do, solely to wait for a new tax year to commence before separating.
The Government response
On 30 November 2021 the Treasury responded to the OTS report confirming its agreement to implementing the extension to the rollover to two years from separation. A further consultation is due to take place in 2022, so there is no immediate plan for the proposals to be implemented, however the positive response from Government indicates change may be on the horizon.
The potential changes look to be good news for separating couples, and may help relieve a significant source of stress and financial pressure from the divorce process.
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This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.