- The general idea of Capital Gains tax (“CGT”) is that if you sell or gift an asset CGT is charged on any increase in value since the asset was acquired.
- For the purposes of this Note – which focuses on recent changes to the rules for divorcing couples – two particular points are made. (References in this note to “spouses” include civil partners.)
Principal private residence relief
- First, there is generally no CGT when you sell or dispose of residential property which has been your main residence throughout your period of ownership – except for the last nine months. This is known as “principal private residence relief” or “PPRR”. So, for example, if you move house and buy a new home and move out of the old one nine months before selling it you will still get full PPRR.
“No gain/no loss” transfers between couples
- Secondly, disposals of assets between spouses or civil partners living together do not generally result in CGT. Instead, they are treated as made on a “no gain/no loss” basis. In other words, broadly speaking, if Mr Spouse transfers an asset he acquired for £20,000 to Mrs Spouse when it is valued at £35,000 there is no gain: instead Mrs Spouse is taken to have acquired it at a value of £20,000.
Current rules for separating/divorcing couples
- In the case of divorcing couples who no longer live together these rules may work harshly.
- When a couple separate, the CGT relief is only available until the end of the tax year of separation. After that the relief is lost. The CGT relief for spouses is therefore only available for a short time. This is a particular issue if a couple separate near to 5 April, when it can be impractical to expect things to be sorted out in time to avoid the CGT.
- As noted above, there is usually no CGT where the “principal private residence” is transferred or sold. But, where one spouse moves out they can only claim full PPRR within a period of 9 months after they move out. This is again a short timescale. If the couple decide to sell the house, then relief from CGT on the gain made on the sale will only apply if one spouse remains there and the sale is completed within 9 months of the other moving out.
Recommendations for change
- The Office of Tax Simplification recommended in its May 2021 Report Capital_Gains_Tax_stage_2_report_-_May_2021.pdf (publishing.service.gov.uk) that divorcing couples be given more time.
- On the “no gain no loss” aspects the OTS said:
“Separating couples continue to get the same treatment as married couples in their (tax) year of permanent separation and transfers can continue to be made on a ‘no gain no loss’ basis for the rest of that year…
However, if the transfer is made in the next tax year then the transfer is treated as taking place at market value and there could be a capital gain even if no cash has changed hands. So, if a couple separate on 4 April 2022 they would only have until 5 April 2022 to transfer their assets without triggering a tax charge.”
- On the PPRR aspect the OTS gave the following example for the case where one spouse moves out before the property sale:
“Simon and Sarah separate, and Simon moves out of their shared home on 30 March 2018. Sarah continues to live there. They retain their shares of the home until 30 March 2019, at which point it is sold to a third party to fund the divorce settlement, resulting in a capital gain.
Sarah gets full Private Residence Relief as she lived there for the full period. However, Simon does not get full Private Residence Relief. He gets relief until 30 March 2018 as he was living there and relief for his final 9 months of ownership. But he does not get relief for the 3 months between 31 March 2018 and 30 June 2018. Alternatively, if Simon had instead sold his share of the property to Sarah within 9 months of moving out he would get full Private Residence Relief.”
Summary of changes to be made from April 2023
Legislation will be introduced in Finance Bill 2022-23 which will provide that:
- separating spouses or civil partners be given up to three years after the year they cease to live together in which to make no gain or no loss transfers;
- no gain or no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement;
- a spouse or civil partner who retains an interest in the former matrimonial home be given an option to claim Private Residence Relief (PRR) when it is sold; and
- individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold, be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the home to their ex-spouse or civil partner
Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Fiona Wayman: email Fiona@mitchells-roberton.co.uk or Eddie Barry: Eddie@mitchells-roberton.co.uk