Capital gains tax on separation and divorce

Where is the good news on tax?  Often hard to find, but the Government have just announced that they plan to extend the time period after couples have separated in which they can transfer assets to one another as part of a divorce settlement, and not suffer a charge to capital gains tax.

The problem at present is that although normally couples who are married or in civil partnership can transfer assets between one another without any capital gains tax consequences, this right ends at the end of the tax year in which they separate.

After that, transfer of a share of the matrimonial home or another property or shares as part of a divorce settlement can give rise to a capital gains tax charge which adds an extra layer of cost and difficulty when finances are tight, and the parties are struggling to reach agreement.

In practice, it is relatively rare that divorcing couples are able to reach agreement about transfer of assets between each other, and actually put that agreement into effect within the financial year in which they separate.

Legislation will be introduced in the Finance Bill 2022/2023 so that separating spouses or civil partners are given up to three years after the year in which they separate in which to make transfers between one another, without any charge to capital gains tax.

Also, where one spouse moves out of the former matrimonial home, but retains a stake in it, they will be given the option to retain a claim to principal residence relief on the house when it is eventually sold.  This will help in some situations, but the rules will have to be looked at quite carefully for a spouse who moves out of the former matrimonial home, retains an interest in it, and then acquires an interest in another house.

The new rules will only apply once the Finance Bill 2022/2023 comes into force.

Lindsey Sharples is a solicitor in the private client team at Barker Gotelee, Solicitors in Ipswich.

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