Practical guide: CGT advice for separating couples

Current rules

Under the current regime for separating couples, the capital gains tax (CGT) rules affecting  Mr and Mrs A are relatively straightforward. While they were married and living together, they were free to transfer assets between themselves on a “no gain, no loss” basis. This means the proceeds are deemed to be the base cost of the asset and so no CGT is payable.

As long they were living together as a couple at some point in the tax year, this treatment persists until the following 5 April; after that there are no special rules, even while they remain married post-separation.

Mr & Mrs A separated in the 2021/22 tax year, so their window to dispose of assets on a no gain, no loss basis closed on 5 April 2022. If one of them were to transfer an asset to the other after that date, the normal CGT rules would apply.

As can be seen, the current rules for separating couples favours those separating at the start of a tax year and means where a couple separates late in the year, asMr and Mrs A did, they only have a relatively short period to benefit from no gain, no loss treatment following separation.

In contrast, a couple separating on 6 April would have 365 days to transfer their assets; a couple separating on the 5 April would have a single day.

Recommendations accepted

The Office for Tax Simplification recommended that the rules be changed. Its suggestion was that taxpayers be given at least two years following the tax year of separation, or any reasonable length of time set by a court, to benefit from no gain, no loss treatment.

The recommendation was accepted by the government. Draft legislation has been published, which HMRC says will allow divorcing couples to focus on the actual divorce without having to worry as much about the tax consequences.

Changes

The draft legislation amends s.225B of Taxation of Chargeable Gains Act 1992 (TCGA), and will apply to transfers made on or after 6 April 2023, and means that where a couple are married but have ceased to live together, they will have up until the end of the third tax year following the tax year of separation to benefit from no gain, no loss treatment on transfers between themselves.

If the couple is granted a formal divorce by a court prior to the end of the three-year period then the divorce date marks the end of the no gain, no loss treatment. However, see below for additional rules connected to a formal divorce.

Example. Alice and Bob separate in December 2023. They potentially have until the 5 April 2027 to benefit from NGNL treatment on inter-spouse transfers.

A further change means that where it has been agreed between the parties that an asset will be transferred as part of the divorce, the asset will receive no gain, no loss treatment even if the transfer occurs outside the window stipulated above.

Example. Cynthia and David separate in December 2023. A court grants their divorce in September 2026 and decrees that several assets must be transferred between them. The transfers take place in June 2027, so outside the stipulated window, but no gain, no loss treatment is available regardless.

Private residence relief

In its current form, s.225B TCGA 1992 affects the private residence relief (PRR) available where a dwelling qualifying for PRR is transferred by the departing spouse to the remaining spouse following a formal agreement or court order. The changes above effectively replace this relief with no gain, no loss treatment for divorcing couples.

S.225B will also be updated to add “someone other than” before “the spouse or civil partner” in two places. This will change the meaning of the affected paragraphs such that PRR treatment will potentially be available for the period of absence where a spouse leaves the marital home and the property is disposed of to a third party at a later date as part of formal divorce proceedings.

With both the old and new versions of s.225B , the remaining spouse must continue to occupy the property as their main residence and the departing spouse must not claim another property as their main residence until the sale occurs.

S.225B requires an election to be made by the departing spouse, so consideration must be given as to which property they wish to receive PRR for the period in question.

Example. Emma and Franco separate in December 2023 and Franco immediately leaves the marital home. They each retain a 50% share of the property until its sale following a court order in December 2026. If Franco elects to claim PRR for the entire period to sale, his new home will not receive PRR for the first 36 months on its eventual sale.

Deferred payments

The final significant proposed change will apply where the departing spouse transfers their share of the marital home to the remaining spouse but will be entitled to a share of the sales proceeds when the remaining spouse comes to sell the property. This is known as a “deferred sales agreement”.

S.25BA will match the treatment of the third party sale to the treatment of the disposal to the spouse, meaning the departing spouse could potentially benefit from no gain, no loss treatment on the third-party disposal.

Example. Gulnara and Hassan separate in December 2023 and Hassan immediately leaves the marital home. Hassan transfers his 50% share to Gulnara, with a deferred sales agreement stating that he is entitled to 50% of the proceeds on any later sale. As no gain, no loss treatment will apply on the inter-spouse transfer, it will also apply on the future third party sale.

Opportunity for planning

Once the draft legislation is enacted, the above changes will apply to any disposals on or after the 6 April 2023.

This gives a significant planning opportunity to Mr and Mrs A. They separated at the very end of the 2021/22 tax year and so based on the current rules they had until the 5 April 2022 to benefit from no gain, no loss treatment for inter-spouse transfers. They clearly missed their window and so any such transfers would be taxed under the normal CGT rules.

However, if they delay the transfers until at least the 6 April 2023 they can benefit from the no gain, no loss and PRR treatments above, which could save them a significant amount of tax. In their case, the separation was amicable and so it will hopefully be easy to convince them to wait a few months. But of course, things aren’t always that straightforward.