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Don't lose sight of gains: changes to tax treatment of transfers between separated couples

Posted on 6 March 2023

When couples separate, there tend to be more important issues to work through than tax. However, not paying attention to it can give rise to significant tax liabilities when assets are subsequently transferred between the spouses.  The rules are changing from 6 April 2023 giving couples more time to consider their financial planning. Until the rules change, for anyone who separated from their spouse or civil partner after 5 April 2020, great care should be taken before the end of the current tax year.

Currently, transfers between spouses or civil partners living together and who have not obtained a divorce or dissolution order and those couples who have separated but were living together at some point during the tax year of separation can transfer assets between themselves on a "no gain, no loss" basis during that tax year. This means that any gain or loss is deferred until the recipient disposes of the asset. If the transfer is in any tax year after the tax year of separation, the "no gain, no loss" principle will not apply.

As an example, a wife transferring a flat held in her own name to her husband (with whom she lives) that has gone up in value since she purchased it by, say, £1 million, will not be taxed.  If the husband comes to sell the property at a later date his gain will be calculated based on the wife's original acquisition costs. However, if the parties separated, with the husband moving out on 1 December 2021 and the transfer took place in the next tax year on 10 April 2022, the wife would not benefit from the no gain, no loss treatment and she would be taxed on her £1 million of gain when she transferred the property to the husband. Any later sale by the husband would attract capital gains tax on any gains on the flat arising since the date of his acquisition, not the wife's original purchase price.

From 6 April 2023, separated couples will have a little more breathing space to make decisions about transfers between themselves as the no gain, no loss treatment will apply for up to three years after the tax year in which they cease to live together.  In the example above, where the couple separated on 1 December 2021, the wife could have made her no gain, no loss transfer of the flat at any point up to 5 April 2024.

When transfers are made on a no gain, no loss basis the recipient should consider factoring in the amount of the likely capital gains tax liability accruing from the period of their former spouse's ownership into any settlement agreement. If they do not, they may end up unwittingly taking responsibility for tax arising on the asset which largely accrued during the transferor's period of ownership.

Rather than rushing into a transfer before 6 April, separated parties should be aware that the rules are being relaxed. Anyone who separated from their spouse or civil partner after 5 April 2020 and who would like to take advantage of the no gain, no loss treatment should wait to make any transfer to their separated partner until after 6 April 2023 but not wait later than 5 April 2024.  

Please speak to your usual Mishcon contact if you would like to discuss the points raised further.

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