Capital Gains Tax  

OTS recommends CGT deadline extensions for divorces and property sales

For the 2018-19 tax year, HMRC identified £8m of CGT that had been paid by fewer than 300 taxpayers citing divorce or separation in their self assessment tax returns. 

While the OTS said this may only impact a small percentage of separating couples, it was “nonetheless important”. 

It added: “It is unrealistic to expect separating couples to have resolved their affairs by the end of the tax year of their separation, in part because financial agreements are relevant for a third of divorces, and it is unfair to those without tax advisers.”

Hayley Trim, family law partner at Irwin Mitchell said when a relationship breaks down, tax is rarely the first consideration.

“Even those who give early thought to their future financial arrangements don’t often have in mind that transfers of assets which take place after the tax year of separation may well result in a charge to CGT”, she said.

Trim added: “This creates a timings issue – for instance people separating in March only have until  April 5 to finalise any transfers between them. It can lead to pretence about when separation took place and, for those in the know, staying together a bit longer in an attempt to avoid the tax problem.

“If implemented, this change could remove an additional pressure on separating couples and allow them more time to negotiate appropriate financial settlements.” 

“If the government is serious about simplifying tax and not encouraging people to change their behaviour because of tax, then this proposal should certainly be followed - we shouldn’t force people to stay together until April 6 just to avoid tax.”

Previous report

Back in November 2020, the OTS recommended that capital gains rates should be more aligned with income tax, their annual allowance reduced and the ‘uplift on death’ removed, among other things.

The first report considered the policy design and principles underpinning the tax, whereas the latest report looked at administrative, technical and practical issues associated with CGT.

But the government has not made any moves to reform the CGT system as of yet.

Laith Khalaf, financial analyst at AJ Bell, said: “The OTS may well feel the chancellor has left them hanging after failing to enact their previous recommendations to increase CGT. 

“However, these latest proposals are more technical than ideological, so will not be as controversial to enact. 

“Investors shouldn’t entirely discount the potential for changes to CGT further down the road though, and so should still make use of their annual ISA allowance to shelter as much as possible from the taxman.