No one likes paying the tax man

Benjamin Franklin once said “in this world nothing can be said to be certain except death and taxes” and whilst this is true, it would also be fair to say that nobody likes to pay the tax man.

Within the realms of family law issues, divorce and taxes can cause issues that are particularly painful and expensive. However, HMRC have recently indicated some significant changes that will likely come into effect from April 2023 and which will provide some very welcome relief. 

The current tax rules

The current tax rules allow for spouses who are living together to transfer assets between themselves on a no gain/no loss basis for the purpose of capital gains tax calculations. This effectively means that if there would be a capital gains tax liability if the asset had instead been sold, that liability will not have to be paid at the time of the transfer to the spouse but will pass with the asset.

For spouses who are no longer living together however, the current rules provide that the ability to transfer without triggering an immediate liability to capital gains tax, is limited to the tax year of their separation. Any transfers taking place after that period are treated as taking place at the market value of that asset and tax payable by the spouse transferring the asset on that gain subject to any reliefs available.

The other issue with the current rules is that divorce will also commonly result in one spouse leaving the family home to live elsewhere. This is problematic from a capital gains tax perspective, as one of the reliefs available to reduce or avoid the need to pay capital gains tax is called private residence relief. This, however, requires the property to be your main or principal residence during the period of ownership. 

There is some help to spouses leaving the family home but this is currently limited to 9 months. The impact of these current rules is that it can result in a significant tax liability being payable very shortly after a property is transferred and for which the funds have to be found. If all the assets are tied up in property or other illiquid assets, this could effectively force a property to be sold in order to finance the tax bill and reduce the funds that are available to meet the couples needs.  

The proposed changes

The proposed changes are going to do a number of things;

• separating spouses or civil partners to 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
• 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. To 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

The impact of these changes will potentially save couples thousands of pounds and remove the need to find money to pay tax, arising as a result of the transfer and so help to lessen the immediate financial burden of divorce. 

It is however, important to keep in mind that any property which is transferred to a spouse under the new rules which they then go on to sell, will have the gain for the purposes of calculating any capital gains tax liability calculated by reference to the entire period of ownership (i.e by their spouse and by them) and this does still need to be addressed in any settlement.  

For anyone going through divorce or who is contemplating separation, the impact of these new rules needs to be given consideration. In particular, decisions will need to be made as to whether it would be better to delay transferred property until the next tax year and how any latent tax liability should be addressed in the settlement.

At Birkett Long Solicitors, our specialist family solicitors are able to provide you with up to date and practical advice specific to your circumstances and have links with tax advisors to find the best options for you. Should you wish to discuss how our services can help you, Karen Johnson can be contacted on 01206 217305 or emailed at [email protected].