In response to a report by the Office of Tax Simplification, HMRC has recently proposed changes to the taxation treatment of assets transferred between partners in the event of divorce or permanent separation. These changes will apply to transfers made with effect from 6 April 2023 and should provide welcome relief to those affected at a particularly stressful time of life.

Current rules

Transfers of assets between spouses and civil partners are generally made on a ‘no gain, no loss’ basis, which means the recipient inherits the cost of the asset for capital gains tax (CGT) purposes (generally the price paid by the transferor) and no CGT is payable on the transfer.

However, for separating couples, this treatment currently only applies until the end of the tax year in which a permanent separation occurs. Thereafter, normal CGT treatment applies. As divorce can be a difficult and protracted process, this means that CGT liabilities may often arise when assets are transferred as part of the financial settlement.

Proposed changes

From 6 April 2023, the CGT rules applying to separating spouses and civil partners will become more favourable. Couples will have:

• up to three tax years following the year of separation to make no gain, no loss asset transfers; and
• an unlimited period to make no gain, no loss transfers that are part of a formal divorce agreement.

Individuals will also have the option to claim main residence relief (an exemption from CGT on the disposal of a person’s main home) where:

• they retain an interest in the former matrimonial home and it is sold at a later date; or
• they have transferred their interest in the former matrimonial home to their ex-spouse or civil partner but are entitled to a percentage of the proceeds when it is eventually sold.

Potential benefits

These are welcome changes that will provide valuable time for separating couples to organise their financial affairs without being put under pressure to rush through a settlement that they have not been able to properly consider. In particular, these changes should:

• make it easier for them to transfer assets on a no gain, no loss basis and avoid incurring tax charges that must be paid even though no cash proceeds have been received - in the past, such charges have often meant that other valuable assets have had to be sold to meet the resultant CGT liability; and
• avoid the need for a separating couple and their advisers to spend time and resources considering more complicated arrangements to access tax reliefs available to them.

Careful planning still required

Whilst these proposals are a positive step, there are still other tax consequences to be considered.

• Once an asset is transferred on a no gain, no loss basis, the recipient is unlikely to be able to benefit from tax reliefs that may have been available to the transferring spouse (for example, capital losses or business asset disposal relief). Given the recipient will take over the transferor’s CGT cost, which may often be low, there may be a significant tax charge triggered on any future sale of such assets that will need to be considered and accounted for within settlement negotiations.
• CGT may still arise on disposals to third parties where sales are required to generate cash or where the future ownership of the asset cannot be agreed between the separating parties.
• The new rules do not extend to income tax, so funds extracted from a family company to fund a divorce settlement for example, will usually generate additional tax liabilities.
• These changes affect UK CGT rules only and do not apply where transfers of overseas assets trigger a tax liability in another tax jurisdiction.

For more information, please get in touch with Tim Gates or your usual RSM contact.