Capital gains tax in divorce – the proposed relaxed rules
When making the difficult decision to divorce, tax planning is unlikely to be at the top of your list. But failing to transfer your assets at the right time may result in unexpected capital gains tax charges, reducing much-needed capital.
What are the current tax rules?
When a couple first separate, transfers and disposals of assets made during the current tax year of separation can be done on a ‘no gain, no loss’ basis. However, under the current tax rules, matters become complex and could involve tax charges when transferring assets such as shares and property, once outside that first tax year of separation. This has become an increasing problem with financial matters becoming increasingly complex, and many divorces taking longer to complete.
Recognising the impracticality of these rules and acknowledging that couples going through the trauma of divorce often do not consider the tax implications and timing of asset transfers, the Office of Tax Simplification has recommended that the tax rules be updated to reflect a fairer and more modern approach to separation and divorce.
The proposed relaxed rules
The Government is proposing to introduce legislation to change the rules for transfers or disposals that take place on or after 6 April 2023. The proposed changes would extend the window of ‘no gain, no loss’ transfers and disposals to three tax years after the end of the tax year of separation, or providing for an unlimited time where there is a formal court order in place.
Tax planning in a divorce
At Wolferstans, we recognise that even with the best intentions and swift agreement between a couple, it can be a real challenge to conclude financial matters before an April deadline, particularly for those who separate later in the year. Being faced with unwelcome, and possibly unexpected, tax bills can make a difficult situation even harder.
Advice from an accountant and good planning can help avoid such problems, but this proposed change will provide much needed flexibility. It won’t remove the need for specialist legal and tax advice, and timing will remain important, but it would be a very positive change.
In the meantime, as family lawyers, we will be keeping a close eye on the progress of these proposed reforms, as it may be a good idea to intentionally delay some asset transfers until the proposed new rules take effect.
How Wolferstans can help you
Provisions within the Taxation of Chargeable Gains Act 1992 cover the tax position when spouses live together and when they dispose of assets on divorce. And while these provide some relief from capital gains tax, including on the primary marital home, the circumstances are limited and can be inflexible in the reality of a divorce. The new rules will not only reduce the financial pressure on divorcing couples but will also give clients more choice on where they choose to live during the divorce process.
At Wolferstans, we work closely with our clients’ accountants to help our clients to achieve the most tax efficient and cost effective settlement. If you need advice to support you in your separation or divorce, contact our Divorce team on 01752 292201.
Web site content note: This is not legal advice; it is intended to provide information of general interest about current legal issues.