Buried within the Budget 2023 documents was a reminder that new tax legislation will apply from 6 April 2023 to couples who transfer assets as part of a separation or divorce on or after this date. The changes follow recommendations for reform initially put forward by the Office for Tax Simplification; a body which is now being abolished; and are contained in the Finance (No.2) Bill 2023.
Currently, married couples and civil partners can only transfer chargeable assets between themselves, without triggering a charge to Capital Gains Tax (CGT), up to the end of the tax year in which they separate. Transfers of assets after this date are treated as taking place at market value, thereby producing capital gains tax charges, potentially.
From 6 April 2023, transfers of chargeable assets between spouses will be treated as occurring at ‘no gain no loss’ for up to three years from the end of the tax year of separation. Where assets are being transferred under a court approved divorce or dissolution agreement, the “no gain no loss” treatment will apply for any longer reasonable amount of time that may be required.
This will come as a welcome relief, particularly to couples who parted late in a tax year and would otherwise have very little time to plan the division of their assets tax-efficiently. The recipient spouse will, however, need to be mindful that they’ll inherit their ex-spouse’s acquisition history and therefore any accrued capital gain. It is advisable to seek tax advice at an early stage in divorce negotiations to ensure that any such inherent chargeable gains are factored in to the valuations of marital property when considering suitable asset division.
Legislation surrounding property transfer
The legislative changes go further where the asset involved is the former marital home. Currently, main residence exemption is only preserved for a departing spouse’s share of any capital gain upon a sale if this occurs within nine months of them ceasing to live there. In circumstances where the property is transferred to the spouse remaining in occupation and this happens after the year of separation, main residence exemption continues to be available provided the transfer happens within nine months of the departing spouse moving out. An extension to this exemption is available upon a claim by the departing spouse, provided no other property has been nominated as the main residence for the same period.
The new rules from 6 April 2023, will ensure that where a spouse retains an interest in the former marital home following their departure, they will be given an option to claim main residence exemption for their period of non-occupation upon a sale of the property. Any such claim would be at the expense of the exemption for the same period on a replacement home that has been acquired and should, therefore, be carefully considered to ensure the optimum tax position is achieved across the properties overall.
Furthermore, extended main residence exemption will be available in circumstances where a spouse transfers their share of the home to the other spouse but retains a right to proceeds upon a later sale under a deferred sale agreement (in the manner of a Mesher or Martin order). The receipt of the deferred sale proceeds for CGT under the new rules will be subject to main residence exemption based on the same eligibility that applied at the time of the earlier ex-spouse transfer.
If you are affected by any of the above, please don’t hesitate to contact us to speak to a member of our expert witness team for advice and guidance.