During a marriage or civil partnership, and while partners are not permanently separated, individuals can transfer assets between themselves without CGT arising. In essence, the other partner is treated as acquiring the assets (or interest in the asset) for the same price (and with allowable expenditure) as their spouse or civil partner originally paid for it.
However, after separation and then divorce/dissolution, the situation becomes more complicated. My colleague, John Boon has discussed this in the past (here).
There are also changes on the horizon (which looked set to be included in Finance Act 2023, but was ultimately left out), which are expected to relax the CGT rules on divorce and dissolution or formal separation. Which rules apply depends on the date of disposal, which also governs the “deemed consideration” used to calculate a gain. We start there, before moving onto the current rules and the new rules.
Transferred under a Court Order
This can be divided into three scenarios:
- Assets transferred under a Court Order before the date of decree absolute or before the dissolution of the civil partnership is made final are treated as disposals under a contract, where the contract does not take effect until the decree absolute, or dissolution is made final. The disposal takes place on that date.
- Where the asset is transferred after the date of the decree absolute or dissolution, in pursuance of a Court Order made before the decree absolute or dissolution, the date of the disposal is the date of the decree absolute or date of the dissolution.
- Where the Order is made after the date of the decree absolute or after the date of the dissolution, and an asset is transferred in pursuance of that Order, the date of the disposal is the date of the Order.
Transferred under Contract or informally
The date of the disposal will usually be when the contract is “unconditional”. If there is no contract, the date of the disposal is usually the date of the transfer.
Why is it relevant?
The timing and terms of the disposal can affect whether the no-gain no-loss principles described above apply, whether the transaction is charged at “deemed market value”, and whether the new rules can or will apply.
The Current Rules
The exemption for transfers between spouses and civil partners applies whilst the couple are married and living together. After their permanent separation, this rule applies until the end of tax year of separation.
So, if you separate in September 2022, you have until 5 April 2023 to make a transfer under this rule.
After this date, the transfer will be deemed to be at market value whilst the individuals are still married or in civil partnership (until decree absolute or dissolution, though it may still be at market value if the individuals are connected for other reasons). After that connection is broken, the transfer may still be at deemed market value if it is made pursuant to a Court Order. This is because a Court Order is not a ‘bargain’ between the parties; it is the Court who decides on the terms, not the parties to the order.
If the asset being transferred is the former “shared home”, it may be that:
- Principal Private Residence Relief (PPRR) applies, in full or in part.
- A gain will be taxed at the higher rates of 18% and 28%.
- A property account may be due and tax payable.
- A self-assessment tax return may be due.
There is an important extension to the rule on PPRR where one spouse or civil partner disposes of the shared principal residence to the other, the recipient continues to reside in that property as their main residence, and the individual transferring has not got a new main residence. That relief needs to be claimed.
This (and the below) should all be considered before entering into the Consent Order on finances.
The New Rules
The Office of Tax Simplification suggested that the rules on CGT for divorce, dissolution and separation be addressed. Following that, HMRC consulted on proposed changes which went further than expected and which are welcomed (I talked about that here). The main issue being that the no-gain no-loss basis only applies while a couple is living together and up to the end of the tax year of separation. As may be seen from the above, after that date a transfer of assets can result in large CGT bills.
The new rules, which are expected to apply to disposals from 6 April 2023, provide that:
- Transfers between spouses and civil partners who have separated will be on a no gain no loss basis for:
- Up to three years after the tax year in which they separate and before divorce, dissolution or separation, or if earlier, the day on which a Court grants a decree absolute, dissolution or separation; or
- For an unlimited period if made in accordance with a formal agreement or order falling within the legislation.
- Where the transfer of an interest in the former shared property is to a third party in connection with a divorce, dissolution or separation, the transferring individual can elect for PPRR to apply.
- Where one party transfers an interest in their former home to the other and, under arrangements in connection with divorce, dissolution or separation, receives a sum on disposal of the property at a later date, the receipt is treated at that date as if it had arisen under the original disposal (which may allow for reliefs to apply).
This is likely to take many disposals between former partners in connection with divorce, dissolution and separation out of the charge to CGT. However, expert advice should be taken before entering into any agreement, as the tax position must be factored into the deal.