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Proposed extension of tax benefits for divorcing couples

Posted on 15 September 2022

Under new draft measures announced in July 2022, the government plans to extend the situations in which couples who are dividing their assets in the course of a divorce (or dissolution of a civil partnership) may defer CGT liabilities.

Married couples and civil partners who live together may transfer assets between themselves on a "no gain, no loss" basis. This means that even if the asset is standing at a capital gain, no CGT is payable on the transfer. Instead, the receiving spouse is deemed to have acquired the asset at their partner's original acquisition cost.

Currently, this tax-free transfer treatment endures only until the end of the tax year of separation. Therefore, for example, if a married couple stops living together in January 2022, they would have until just 5 April 2022 to transfer assets to each other without triggering any CGT liability. Transfers after this restrictive deadline can therefore give rise to a "dry" tax charge, meaning CGT becomes payable by the transferring spouse even though they have received no sale proceeds from which to pay that tax charge.

It is instead proposed that:

  • Couples will have up to three tax years after separation to benefit from "no gain, no loss" treatment.
  • "No gain, no loss" treatment will also apply to any assets divided pursuant to a formal divorce agreement (even if outside the three-year window).

Whilst the relaxation of the rules is good news for separating and divorcing couples, it makes it more important than ever to ask questions regarding the CGT position when agreeing the division of assets. The recipient spouse cannot assume that they will receive assets with a "clean slate":

  • The prospective CGT liability on any inherent capital gain (or loss) must be factored in when ascertaining the value of assets, and calculating a fair division.
  • Enquires should be made into (and, where possible, evidence provided of) any relevant deductible expenditure incurred by the transferring spouse, to ensure the receiving spouse can claim all available deductions on their own eventual disposal of the asset.

If passed, the changes will take effect for disposals occurring on or after 6 April 2023. Assuming the changes are passed as proposed, couples who separate now should therefore be able to benefit from the extended provisions.

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