Capital Gains Tax (‘CGT’) has long been a trap for the unwary on separation and divorce, but new rules should make the problem a thing of the past.
CGT is a tax on the profit when you sell (or ‘dispose of’) an asset that has increased in value since you acquired it, the tax being payable on the amount of the increase.
Obviously, it is often the case that on separation or divorce assets may be disposed of, by being transferred to the other party. Such disposals are potentially chargeable to CGT.
But transfers between spouses are subject to a special rule, which is designed to ensure that the transfers do not attract CGT.
The special rule provides that such transfers are made on a “no gain/no loss” basis in any tax year in which they are living together.
The effect of this is that any gain from the transfer is deferred until the asset is disposed of by the receiving spouse, who will be treated as having acquired the asset at the same original cost as the transferring spouse.
But the problem for separating spouses is that the special rule only applies if the transfer is made in the tax year in which they separate. After that, normal CGT rules will apply to the transfer.
This gives the couple very little time to sort out their financial settlement, and can mean that the settlement is dictated by CGT considerations, rather than considerations relating to the separation or divorce.
Thankfully, this issue is soon to be a thing of the past, thanks to changes being made to the CGT rules by the Government.
The changes will include two particular provisions to help separating spouses.
Firstly, they will be given up to three years after the year they cease to live together in which to make no gain/no loss transfers.
Secondly, the no gain/no loss treatment will also apply to assets that they transfer between themselves as part of a formal divorce agreement, in which case there will be an unlimited time to make the transfer.
The new rules will apply to transfers that take place on or after the 6th of April 2023.
The new rules are very welcome, although it should be understood that CGT may still be payable when the receiving spouse eventually disposes of the asset – something that should be taken into account in the settlement.
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