New capital gains tax rules for separating couples

Draft legislation has been published for Finance Bill 2022-23 to allow an extended period for spouses or civil partners to transfer assets to each other on a no gain/no loss basis following a separation where the disposal is on or after 6 April 2023. The legislation also includes changes to the availability of private residence relief (PRR) on separation where the family home is disposed of to a third party, or in the case of deferred sale agreements.

Under the current rules, spouses or civil partners have only until the end of the tax year of separation to transfer assets between each other on a no gain/no loss basis. For a couple who cease to live with each other towards the end of a tax year, this may leave little time in which to make transfers on a tax neutral basis.

Transfers made after this point are treated as disposals to a connected person. Transactions between connected persons are always treated as transactions otherwise than by way of a bargain made at arm’s length, and require that any actual consideration must be replaced by the market value of that asset at the date of transfer. This may give rise to chargeable gains and potentially dry tax charges (ie, a tax liability arising from a transfer where no money changes hands).

Where there is a transfer of the family home as part of a separation and PRR is not available to fully cover the gain arising, the current rules may result in substantial and unforeseen tax liabilities for separating couples.

The Office of Tax Simplification’s second report on capital gains tax in 2021 recommended that changes be made to address this.

Extension of relief

The new rules allow for a longer period in which separating couples can make transfers to each other on a no gain/no loss basis, meaning that disposals are covered until the earlier of:

• the end of the third tax year following the year in which the couple ceased to live together; or
• the grant or an order or decree for divorce, the annulment of the marriage, the dissolution or annulment of the civil partnership, or the date of a separation under a separation order.

This time period is indefinite where the transfer is made in accordance with an agreement or court order.

This allows any marriage assets, not just the family home, to be transferred within a more generous timeframe that can be linked to agreements and arrangements made between the former couple.

The marital home

It is currently possible to claim PRR where the home is transferred to the spouse or civil partner, providing that:

• the transfer is made pursuant to a court order or an agreement between the couple in connection with their permanent separation or divorce;
• the home has continued to be the only or main residence of the transferee spouse or civil partner; and
• the transferor has not elected for any other home to be treated as their main residence for that period.

Given that no gain/no loss treatment would apply to such transfers from 6 April 2023, this provision would become redundant. However, it is proposed to expand the availability of PRR to allow relief on disposal of the former family home to a third party (instead of the former spouse or civil partner), provided that the above criteria are met.

Finally, a new provision will allow for PRR on disposals under a deferred sale agreement or order. Under a deferred sale order, complete ownership of the matrimonial home is vested in the party remaining there, but the property is charged with payment of a sum of money to the departing party. The new rules set out that the profit share received by the transferor on the sale to a third party is treated as a gain attributable to the initial disposal (ie, the transfer to the spouse or civil partner who remained in the property). PRR therefore applies in the same proportion that would have applied to the initial disposal to the spouse or civil partner.

When does the transfer occur?

Depending on the legal circumstances surrounding the transfer of assets, the date of disposal for capital gains tax purposes may differ. Care may need to be taken regarding these dates to ensure separating couples fall within the expanded no gain/no loss window, depending on their circumstances. 

For assets transferred without a court order:

• If assets are transferred by a written contract, the date of transfer is the date of the contract.
• If assets are transferred without a written contract, the date of disposal is the earlier of the date of the actual transfer, or the date of a binding agreement for the transfer.

For assets transferred under a court order, there are different effective dates of the disposal depending on whether the court order is made before or after the decree absolute and when the transfer takes place. However, given the indefinite period to make no gain/no loss transfers under a court order, these dates should no longer affect the tax treatment from 6 April 2023.

Final thoughts

The longer no gain/no loss window and widened PRR reliefs will help many – although not all – separating couples at what is already a difficult time. Given the dates when the rules come into effect, however, individuals and advisers will need to carefully consider the timing of asset transfers to make best use of these changes, as explained below. 

Who will benefit?

Clearly, the new rules provide additional leeway for separating couples. However, it should be noted that the rules apply only to disposals made on or after 6 April 2023. This leaves a period until then in which the current rules continue to apply and creates the bizarre situation that a separating couple could benefit from the new rules, but only if they delay transferring assets for a few months.

Here are four examples demonstrating the impact of the dates of separation and transfer and the form of transfer.

Example 1: transfer of assets before 6 April 2023
Ainsley and Brook are married and are in the process of separating. Ainsley moved out of their shared home on 30 April 2020. Ainsley transfers assets to Brook on 30 December 2022.

This will be a disposal to a connected person and will occur at market value even in the absence of consideration. This is because the new rules have not yet taken effect.

There may therefore be a chargeable gain on disposal and an associated tax charge for Ainsley.

Example 2: transfer of assets on or after 6 April 2023

Carey and Dakota are civil partners and are in the process of separating. Carey moved out of their shared home on 30 April 2020. Carey transfers assets to Dakota on 30 April 2023 in advance of the dissolution of their civil partnership.

The disposal will be on a no gain/no loss basis as the transfer takes place before the end of the third tax year following the year that they ceased living together.

Example 3: separations prior to 6 April 2020

Emery and Finley are married and are in the process of separating. Emery moved out of their shared home on 1 April 2020. Emery transfers assets to Finley on 30 April 2023 – before the court grants a decree for their divorce.

This will be a disposal by Emery to a connected person and may give rise to a chargeable gain, as the transfer has occurred more than three years following the end of the tax year of separation and the transfer is not made under a separation agreement or court order.

Example 4: transfers made under a separation agreement or court order

Gurpreet and Henley are married and are in the process of separating. Gurpreet moved out of their shared home on 1 April 2020. Henley transfers assets to Gurpreet under a court order on 30 April 2023.

The disposal will be on a no gain/no loss basis, as it takes place under a court order so is not subject to the three-year time limit.

About the author

 Mei Lim Cooper, Technical Manager, Personal Tax, ICAEW