Introduction:
In a world where financial matters are often complicated, the UK government has taken steps to ease the burden on separating couples during the emotionally challenging process of divorce. Announced in the Spring Budget, new legislation will introduce capital gains tax (CGT) reliefs for divorcing couples, effective from 6 April 2023. This blog will explore the implications of these changes and how they will impact the transfer of assets between spouses and civil partners, as well as the treatment of the former matrimonial home.
‘No Gain, No Loss’ Principle Extension:
A key aspect of the legislation is the extension of the ‘no gain, no loss’ principle to cover the transfer of all assets between separating spouses and civil partners. This rule applies to asset transfers for up to three years after the tax year in which the couple ceased living together. The ‘no gain, no loss’ principle essentially means that for CGT purposes, the individual receiving the asset will be treated as if they acquired it at the same cost as the transferring spouse or civil partner. Consequently, this reduces the potential tax burden when the asset is eventually sold.
Inclusion of Formal Divorce Agreements:
Importantly, the new CGT relief will apply to all transfers of assets undertaken as part of a formal divorce agreement. This ensures that couples who choose to formalise their separation through legal channels are not penalised for their decision. By providing this relief, the government aims to promote fairness and equity during the division of assets in a divorce.
Private Residence Relief (PRR) Option:
One of the more significant changes introduced by the legislation concerns the treatment of the former matrimonial home. A spouse or civil partner who retains an interest in the property will be given the option to claim private residence relief (PRR) when the home is eventually sold. PRR exempts homeowners from paying CGT on the sale of their main residence, provided certain conditions are met.
Previously, an individual had to be living in the property at the time of sale to qualify for PRR. However, under the new legislation, spouses and civil partners who have moved out of the matrimonial home but still retain an interest in it can now claim PRR, potentially saving thousands in CGT. This change recognises the unique circumstances faced by divorcing couples and aims to alleviate some of the financial stress associated with the sale of the family home.
Effective Date:
The new CGT reliefs will come into effect from 6 April 2023, providing divorcing couples with ample time to familiarise themselves with the changes and seek professional advice if needed. By introducing these measures, the government aims to create a fairer tax system for separating couples and to help alleviate some of the financial pressures that come with divorce.
Conclusion:
The introduction of CGT reliefs for separating couples marks a positive step towards addressing the financial implications of divorce. By extending the ‘no gain, no loss’ principle, including formal divorce agreements, and offering the option of PRR for the former matrimonial home, the UK government has demonstrated its commitment to easing the financial burden on divorcing couples. As we approach the effective date of 6 April 2023, it is crucial for separating couples to be aware of these changes and seek professional advice to ensure they can make the most of these new reliefs.
Summary of HM Treasury Policy Paper “Capital Gains Tax: transfer of assets between spouses and civil partners in the process of separating“
