UK Tax Rules for Separating Couples: Changes Effective April 6, 2023
The Spring Budget announcement in March 23 confirmed significant changes aimed at simplifying tax rules for married couples upon separation. These changes taking effect from April 6, 2023.
When assets are transferred between spouses, the fundamental principle is a 'no gain-no loss' arrangement for Capital Gains Tax (CGT) purposes. This implies that no CGT is applicable, and the recipient inherits the asset at its original cost. Where couples are separating, we need to review different rules.
Historically, married couples and civil partners enjoyed the benefit of transferring assets between themselves. This was without incurring Capital Gains Tax (CGT), thanks to the 'no gain, no loss' relief. This relief covered various assets, including second homes, shares, and gifts. However, the relief only applied to spouses who had lived together at some point during the tax year. In cases of divorce and where one spouse leaves the marital home, only the time between the spouse leaving and the end of the tax year would be covered by that relief.
This meant that, if a couple separated on 15 October 2022, with the tax year ending on April 5, 2023, to leverage the 'no gain, no loss' relief, they had until April 5, 2023, to transfer their assets.
Missing this deadline led to normal CGT treatment for property transfers, with the transferor paying tax based on the asset's market value at the date of transfer. This created unnecessary stress and haste for couples undergoing separation.
The revamped CGT rules aim to alleviate this pressure by extending the 'no gain, no loss' relief period for separating couples. Under the new rules, the following applies:
Moreover, specific regulations have been implemented to address individuals maintaining a financial interest in their former family home post-separation. These regulations come into play when the property undergoes an eventual sale:
The new rules apply to couples who separated in the tax year 2019/20 or later.
It's crucial to note that these rules are specific to married couples or civil partners.
Consider a couple separating on December 18, 2022, with the tax year ending on April 5, 2023. To leverage the 'no gain, no loss' relief, they would now have until April 5, 2026, to transfer their assets.
After the final tax year for ‘no gain, no loss’ relief, transfers between spouses. This is either as gifts from one to the other, not by court order (see above). It may result in a CGT liability for the transferring spouse as (subject to any reliefs or exemptions) the transfers are deemed to take place at market value. This is because, as they are still connected for CGT purposes. This can result in individuals being assessed for CGT on a transfer with no cash exchanging hands
By allowing more time to transfer assets without incurring CGT, these changes can especially benefit those involved in complex proceedings. The additional time enables couples to focus on the intricacies of their separation and potentially reach a fair, beneficial agreement.
Please note that this article only summarises the CGT implications of separation. There are however equally important considerations for both stamp duty land tax (SDLT) and inheritance tax (IHT).
Do you have any queries about CGT, SDLT or IHT on separation and divorce? Then please get in touch and our expert tax advisers will assist with your query.
