Separating couples are often surprised to discover that upon transferring a property to their spouse, the spouse who is transferring the property can be liable to pay Capital Gains Tax (“CGT”), that is tax payable upon the ‘gain’ that has been made on their share of the property.
Under present legislation, married couples can usually transfer property between themselves without tax implications arising from the transfer, so long as the transfer takes place within the tax year of separation (“the grace period”). This means that if a couple separated on 1st June 2022, they have until 5th April 2023 to make the transfer and in making the transfer during that period they would avoid immediate payment of any CGT that would have arisen. Should the separating couple who separated on 1st June 2022 wait until say, 10th April 2023 to transfer the property to the other spouse, then if there has been a financial gain (i.e. the difference between the purchase price and the value as at 10th April 2023), then subject to a calculated assessment, CGT could be payable and would need to be paid to HMRC within 30 days of the date of transfer of the property.
When couples suffer the breakdown of their relationship, they are generally dealing with the emotional turmoil within the family before they can consider their finances and have generally not anticipated a large CGT bill. The stress of this for separating couples has recently been recognised by the Government which has resulted in the Office of Tax Simplification producing a set of recommendations from which the Government has now published draft legislation. The new rules embodied within the Finance Bill 2022-2023, are designed to make the transferring of assets less stressful for separating couples.
Under the new draft legislation, due to come into effect on 6th April 2023, in which no significant changes are anticipated, the period of time afforded to separating couples to transfer assets between them in order to avoid payment of CGT, has been extended. Under the new legislation, separating couples will continue to benefit from the full tax year of separation for transferring assets, plus an additional 3 years. Under the new legislation, a couple who separates on or after 6th April 2023 (the start of the 2023-2024 tax year) will have until 5th April 2027 to transfer property to one or the other without incurring CGT. Note however that a couple who separates the day before, on 5th April 2023 (the last day of the 2022-2023 tax year), would only have a 3 year window to transfer property between them i.e. their transfers would have to take place no later than 5th April 2026 to avoid CGT being payable. Under then new legislation, it is understood that the time period for payment of any CGT payable is to be extended to 60 days (from the present 30 days).
An additional benefit to separating couples under the new draft legislation, is that where a transfer of property is pursuant to a court order then indeed there is no time limit to be applied for the transfer of such property thus avoiding CGT being payable upon transfer to the other spouse.
It is of huge benefit to any married couple who are separating to have the division of their assets subject to a court order, not only to benefit from the intended new CGT rules, but also for each of them to have finality in relation to their marital financial affairs. Legal advice in relation to the obtaining of such orders is essential.
Where a divorce is to include the division of assets it can be very important to take specialist tax advice.
If you would like to speak to someone from our Family Department, call 01642 356500/0191 2322574.
