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Capital Gains Tax changes: what are the new rules?

July 2022

The Government has published proposals to change the rules that apply to transfers of assets between spouses and civil partners who are in the process of divorcing in “hope this will give spouses and civil partners more time to transfer assets without incurring a charge to Capital Gains Tax”.

Current CGT rules

Effectively, capital gains tax (CGT) is the tax paid on the gain of an asset which is being disposed e.g. property. The current rule is that any transfer of a property from one spouse to another is on a ‘no gain no loss’ basis. Whilst transfers of assets between spouses are generally not subject to CGT, this changes when the couple separates.

When a couple separate, this rule continues to apply only until the end of the tax year. Therefore, the date of separation is crucial when transferring assets as this can give rise to a CGT liability. The tax payable on CGT is charged at either 18% or 28% depending on the transferring spouse’s tax rate.

In most circumstances the main asset will be the family home (FMH). If the FMH is sold, Principal Private Residence Relief (PPR) will be available to both parties.  However, if a spouse vacates the FMH while the other remains, this can result in a tax liability for the departing spouse. This is because the PPR may not apply to the non-resident spouse’s share.

The new proposed rules

The new rules will extend the time frame in which spouses and civil partners can transfer assets on a ‘no gain no loss’ basis from one year to three years at the end of the tax year of separation.

Crucially, the ‘no gain no loss’ treatment will apply to separating spouses if there is a formal divorce settlement i.e., a transfer can be made after the three-year time limit and no CGT will be payable.

The proposed rules also extend the availability of PPR i.e., if the non-resident spouse retains an interest in the family home, they can continue to claim PPR if the property is subsequently sold.

These changes give separating couples time to consider their financial and tax position in full and come to a fair agreement on the division of assets without the added time-pressure of a tax liability.