The Spring Budget announced on 15 March 2023 has provided confirmation of changes which will be made to simplify the tax rules for married couples on separation, as of 6 April 2023.
Married couples and civil partners may make transfers of assets between themselves without having to pay Capital Gains Tax (CGT). This applies to all assets including second homes, shares and gifts. This is known as the ‘no gain, no loss’ relief.
If spouses or civil partners separate, historically, they have been able to take advantage of the ‘no gain, no loss’ relief until the end of the tax year of separation. Any transfer made to one another must be completed on or before 5 April in the same tax year that they separated. This means that historically, couples who separate in March may have only had weeks or days to complete transfers, whereas those who separate in May have over 11 months.
If couples missed this deadline, any transfers of property (which could be made by order of the court) were treated as normal disposals for CGT and the transferor paid CGT based on the market value of the asset at the date of the transfer.
The historic rules only served to create added panic for couples already in the middle of a stressful separation, often leading to a rush to transfer property before the end of the tax year.
The new CGT rules are designed to improve this and will allow much more time for couples to plan the division of their assets and transfer property after separation without the pressures of an imminent tax deadline.
Under the new rules, separating couples will be able to benefit from the “no gain, no loss” relief on transfers for an additional three years from the end of the tax year of separation.
The two significant dates are: the date of separation and the date of disposal.
If a couple separated on 10 September 2022, the end of the tax year of separation would be 5 April 2023. To benefit from the “no gain, no loss relief”, they must transfer their interest in an asset to the other within three years of the 5 April 2023. In this example, the deadline for transfers would therefore be on or before 5 April 2026.
The date of separation is important. Legal separation is a matter of fact. There are various factors to take into consideration. A separated couple could still be living under the same roof and yet be considered ‘legally separated’. A couple may be deemed legally separated if they sleep in separate rooms, eat separate meals at different times and live completely self-sufficiently from each other. A solicitor will be able to advise in more detail if this is of concern to an individual’s particular circumstances.
The date of disposal is the date on which the property or other asset transfers from one party to the other.
The transfer could be part of a court order (a final financial order made by the court in financial remedy proceedings, or a financial consent order agreed by the parties as part of their divorce) and later ratified in a Final Order on divorce (the old Decree Absolute).
The date of disposal is likely to be either the Final Order or the Consent Order, whichever comes later.
If you have separated in the tax year 2019/20 or later, you could benefit from the “no gain, no loss” relief extension. Our specialist Family and Tax teams will be able to advise you on timescales and transfers of assets to take advantage of the extension coming from 6 April 2023.
The new rules only apply to married couples or civil partners. If you are in an unmarried, cohabiting relationship our team can advise you on the best ways to protect your assets.
For tailored advice about tax on divorce please get in touch.
With thanks to Henny Knott, Trainee Solicitor, for her assistance with this article.
*All references to marriage above include civil partnerships and judicial separations. All references to divorce include dissolution of a civil partnership or judicial separation.