Prepare for imminent tax changes around divorce
Capital gains tax rules are changing to make it easier for divorcing couples to divide their assets after separating without incurring a tax charge.
Leading tax lawyer, Paul Davies, who leads our Manchester private capital team, says the two taxes most affected by divorce are inheritance tax (IHT) and capital gains tax (CGT) – with changes to the way the latter is applied becoming effective from 6 April 2023.
With capital gains tax, transfers between spouses are normally made on a ‘no gain/no loss’ basis – ie the transferee is treated as having acquired the asset for the amount or value it was acquired for by the transferor. This treatment applies during any tax year in which the two spouses are married to each other and not separated.
Otherwise, transfers are likely to be at ‘market value’ either on the basis that they are a gift or on the basis they are made in consideration of the rights the other spouse has under the divorce – which, Paul says, can give rise to a CGT charge.
“This is a particular problem for spouses that have separated some time prior to divorce or who have assets that will take time to transfer after divorce, for example a property subject to a mortgage.
“A further possible problem arises if one spouse moves out of the matrimonial home but still retains an interest in it. On a later sale, the non-occupying spouse may not qualify in full for the usual exemption from CGT for the disposal of a person’s residence, because (broadly) the exemption applies only to the period(s) during which the person has occupied the property as their only or main residence.
“On the other hand, after divorce a couple is able to have two ‘residences’ that qualify for the CGT residence relief. A married couple are only allowed one residence between them.”
To mitigate some of these problems, the government has introduced a number of changes that will apply to disposals made after 5th April 2023:
- Separating spouses will be given up to three years after the year they cease to live together in which to make no gain/no loss transfers
- No gain/no loss treatment will also apply to assets that separating spouses transfer between themselves as part of a formal divorce agreement
- A spouse who retains an interest in the former matrimonial home will be given an option to claim CGT residence relief when it is sold
- Individuals who have transferred their interest in the former matrimonial home to their ex-spouse and are entitled to receive a percentage of the proceeds when that home is eventually sold, will also be able to claim CGT residence relief on those proceeds
Paul says: “The effect of these changes will be to grant more time following separation to transfer assets without triggering a CGT charge – up to three years following the tax year of separation or at any time as part of a formal divorce agreement.
“In addition, you may still benefit from principal private residence (PPR) relief if you have left the former matrimonial home and it is subsequently sold to a third party, or if it is sold following a deferred sale agreement.”
When it comes to inheritance tax, the general exemption for transfers between spouses will continue up until the date of decree absolute. If the couple separates, but does not divorce, then the exemption will continue to apply.
“Transfers between spouses that are made after divorce will not be subject to IHT if made in accordance with a court order, or (usually) in accordance with a binding agreement made pre-divorce,” says Paul.
“Otherwise, a transfer to a former spouse is likely to be treated the same way as a transfer to any other individual, ie as a ‘potentially exempt transfer’ that will be taken into account on death if the person making the transfer dies within the following seven years.”
Paul has been assisting individuals, trustees and executors with all manner of legal and tax issues for 20 years. He has particular specialisms in estate planning, inheritance tax mitigation and the use of onshore and offshore trusts, and other asset holding vehicles.
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