When considering separating, the last thing most couples will think of is timing it around the tax year, and their first port of call would be to visit their solicitor, not their tax adviser.
However, under the current tax rules, couples that separate towards the end of a tax year find themselves at a potentially significant disadvantage compared with those that separate early in a tax year, making them more likely to end up with a capital gains tax charge.
With the Office for National Statistics indicating that more than 113,000 couples divorced in England and Wales in 2021, and that half of all married couples in Great Britain have a wealth of more than £500,000, a significant number of people may suffer tax implications on divorce and separation.
Under the current rules, transfers between spouses and civil partners between the date of separation and the end of the tax year of separation are deemed to be no gain/no loss transfers for CGT purposes, so any such transfers will not incur a CGT liability.
Once the end of the tax year of separation has passed, however, any transfers are deemed to take place at market value, and could, therefore give rise to a tax charge, unless the transfer is made under a court order whereby it will be exempt.
[Divorcing couples] may wish to delay intended transfers until at least April 6 2023.If no court order is in place at the time a transfer is made between separated couples that are not divorced, the tax charge may even be higher, as any gain would be based on the market value of the asset, rather than the transfer value agreed between the parties.
The now disbanded Office of Tax Simplification produced a report in 2021 recommending that the time period for no gain/no loss transfers be extended to allow more time for couples to come to a financial agreement – after all, the average divorce took 53 weeks from application (not separation) in 2020.
Draft legislation extending the no gain/no loss provisions for separating spouses and civil partners to cover the three complete tax years after separation was published in July 2022, with the intention of this coming into effect from April 6 2023.
While the draft legislation is not retrospective, it is the date of the transfer of assets that is key, not the date of separation, so there may be couples that separated in the 2020-21 and 2021-22 tax years that would face a CGT bill on transfer today, but once the new legislation comes into force would not be subject to tax.
They may, therefore, wish to delay intended transfers until at least April 6 2023.
However, while the intention to legislate this change was confirmed in the autumn, the draft legislation has not yet been included in a finance bill, and therefore has still not been passed to become law.
The rules for inheritance tax are different.The timing of this remains uncertain as April 6 2023 approaches, and this may lead to couples having to make decisions about their futures based on an uncertain tax landscape.
To add further confusion to the position, the rules for inheritance tax are different, and spouses and civil partners are treated as such until their divorce is finalised, even if they are no longer living together – that is, there is generally no IHT due on a transfer of assets before divorce, irrespective of the timing of the transfer.
As we head towards the spring Budget on March 15 there is scope for this legislation to be included in a spring finance bill. Although, this is unlikely to be passed before April 6 2023, so the effective date of the new rules may well change.
While this new legislation will not exactly equalise the position for CGT and IHT, it is a welcome change as it will reduce the potential for tax-related headaches at a time that is already stressful enough.
In most cases, where divorce and the financial settlement are completed within the three tax years following the year of separation, the CGT and IHT position will be consistent, allowing couples to separate their finances without having to worry about tax charges.
Sara Bonavia is associate director at RSM UK
