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The process of separation and divorce can be emotionally and financially challenging. Navigating the financial landscape of dividing assets becomes even more crucial as the government introduces new changes to Capital Gains Tax (CGT) regulations that directly impact separating couples. This comprehensive guide will explore the current rules, the upcoming proposed changes from the Spring Budget, and the importance of understanding Her Majesty’s Revenue and Customs (HMRC) guidance during this tumultuous period.
Current CGT Rules: Since April 2020, the CGT exemption period for main residences has been reduced from 18 months to 9 months. This change means separating couples have a shorter window to transfer their main residence without incurring CGT. It is crucial to know this new timeline to avoid unexpected tax liabilities.
Upcoming Changes from the Spring Budget: The government’s Spring Budget announced several proposed measures aimed at providing additional support for spouses or civil partners going through a separation. These measures will apply to asset transfers between spouses or civil partners during the separation process and include:
- Extension of No Gain/No Loss Period: Couples will have up to three years after the year they cease living together to make asset transfers on a no gain/no loss basis.
- Unlimited No Gain/No Loss Period for Divorce Agreements: Couples with a formal divorce agreement will have unlimited time to transfer on a no gain/no loss basis.
- Private Residence Relief (PRR) Option: Spouses or civil partners retaining an interest in their former family home can claim PRR when the property is sold, potentially reducing or eliminating their CGT liability.
- Special Tax Treatment for Proceeds: Individuals who have transferred their interest in the former family home to their ex-spouse or civil partner and are entitled to a percentage of the proceeds upon the home’s sale will be able to apply the same tax treatment to those proceeds as when they initially transferred their interest in the property.
These changes are set to apply to disposals occurring on or after 6 April 2023.
HMRC Guidance for Separating Couples: HMRC has published guidance to help couples navigate the current and upcoming CGT rules during separation and divorce. Key points from this guidance include:
- Separation Date: The date of separation is considered to be when the couple starts living separately and has no intention of getting back together. This date is essential for determining the 9-month exemption period and the upcoming extended no gain/no loss period.
- Transfers Between Spouses: Assets transferred between spouses during the tax year in which they separate are considered “no gain, no loss” transfers. This means the spouse receiving the asset acquires it at the same base cost as the transferring spouse, and CGT is not applicable at the transfer time.
- Private Residence Relief: Couples can claim PRR on their main residence, which can reduce or eliminate CGT liability. PRR is available for the time a couple lived together in the property and for the last nine months of ownership, even if they were not living together during that time.
Navigating CGT rules during separation and divorce can be complex, making it essential to consult a solicitor or tax advisor for professional guidance. They will help you understand tax implications, offer personalized advice, and ensure you follow the latest HMRC regulations. The ever-changing Capital Gains Tax landscape, including the Spring Budget’s upcoming changes, emphasizes staying informed and prepared. Couples can effectively manage asset division and tax consequences by grasping current rules and proposed measures and adhering to HMRC guidance.
The proposed changes, such as extending the no gain/no loss period and offering more Private Residence Relief options, will grant couples increased flexibility and financial stability during the trying separation and divorce process. However, it is vital to consult our specialist tax advisor, who can provide tailored advice based on individual circumstances, ensuring compliance with HMRC regulations and safeguarding financial well-being during this difficult time.
As these changes come into effect on 6 April 2023, separating couples must remain aware of these new measures as they address the financial aspects of their separation. With proper guidance and understanding of the latest Capital Gains Tax rules and proposals, couples can make informed decisions that secure their financial future and maintain compliance with HMRC regulations during this challenging period.