The end of a marriage or civil partnership often involves many tough decisions for couples. These can include how long either person stays in the family home, and ultimately whether the family home or any other assets are to be sold or transferred between them. What many couples may not know is how the date of their separation and speed at which they implement asset distribution can impact their capital gains tax.
Fortunately, this summer the government announced changes to tax rules effective from 6 April 2023 which will give thousands of couples more flexibility when it comes to making these decisions. But until then, it is important you understand the current rules and capital gains tax implications if you are considering ending a marriage or civil partnership within this tax year.
What are the current rules?
Capital gains tax may be charged on the increase in the value of an asset from the date it was acquired to the date it is disposed of (usually by selling or transferring it).
There are some exceptions to this. Most commonly, homeowners will pay no tax if they claim principal private residence (PPR) relief on properties they occupy as their main or only home. The relief extends to the last nine months of ownership of the property, meaning an owner can live outside of the property for up to nine months without incurring a tax charge on the sale.
Married couples and civil partners can also transfer assets between themselves without immediate tax consequences under the ‘no gain no loss’ principle. This means the spouse or civil partner receiving an asset is treated as having acquired it at the value their spouse or civil partner originally acquired it. The person receiving the asset effectively inherits the tax liability from their spouse or civil partner, but will not have to pay any tax until they choose to dispose of the asset themselves.
After a separation, the ‘no gain no loss’ rule is extended to the end of the tax year in which the couple separated. After the end of the tax year, they can incur a tax charge if they transfer assets between themselves.
What problems can arise under the current rules?
The current rules on PPR relief require separating couples to think carefully about whether they move out of their main home even after a relationship has ended. In reality, very few couples are able to reach and implement financial agreements within nine months of a separation, so moving out often leads to a capital gains tax charge once the family home is disposed of.
The time limit on the use of the ‘no gain no loss’ rule is widely regarded as unfair. For example, it means a couple separating on 6 April would have a full year until the following 5 April to make tax free transfers, but a couple separating on 1 April has just 4 days to take advantage of the rule.
As capital gains tax must be paid within 60 days of a transaction, the current rules mean that couples transferring assets between themselves after the end of the tax year may have to fund their tax liabilities from savings or other assets.
What is changing?
From 6 April 2023:
- The ‘no gain, no loss’ rule will be extended for up to 3 years from the date of separation
- The ‘no gain, no loss’ rule will apply for an unlimited period for separating couples to transfer assets between themselves as part of a formal agreement or court order.
- Spouses or civil partners who move out of a family home they own will be able to claim PPR relief once the property is sold, regardless of the length of time that they have lived elsewhere, as long as their absence from the property was due to a separation.
- Spouses or civil partners that transfer their interest in a family home to their ex-spouse or civil partner in return for a charge on the property will be able to claim PPR relief when the property is eventually sold.
These changes will mean that separating couples will be less likely to incur immediate capital gains tax charges. It will also allow more couples additional time to focus on reaching financial settlements without the added stress of looming tax deadlines.