27th April 2020
PLEASE NOTE: This article on ‘Changes to capital gains tax reliefs when spouses and civil partners separate’ does not constitute nor contain tax advice, but is merely meant to be informative. Individuals should always seek tax advice from appropriately regulated experts.
Among all the other changes being made to people’s financial arrangements, firstly as a result of our anticipated Brexit, and then as a result of the Covid-19 pandemic, and their concomitant impact on economies, both macro and micro, share values, savings rates and property values, it’s easy to forget that significant changes have also been made to personal tax arrangements. For those in marriages or civil partnerships who are separating, or for those who have already separated and are going through divorce or dissolution proceedings and their associated financial remedy proceedings, that includes changes to Capital Gains Tax.
The Taxation of Chargeable Gains Act 1992 has been amended several times. Until 5th April 2020 the position was as follows:
- Where spouses are living together transfers of interests in assets from one to the other that are chargeable to capital gains do so without any CGT arising.The transfer is deemed to take place for nil gain, nil loss. The transferee obtains the asset for the same value as that for which the transferor required it. Upon a disposal of that asset by the transferee to a third party, they bear the CGT burden, but also have the benefit of their own annual exemption to mitigate that burden.
- Upon permanent separation and divorce, the spouses remain connected parties until the date of decree absolute.The effect of being a connected party is that, where a chargeable asset is transferred to the other spouse (as with other connected parties), no matter what the consideration for that transfer, it is deemed to take place at market value and a chargeable transfer occurs. Transfers made under a court order, but which take place at a date later than that of the court order (e.g. where they are made within 56 days of the date of the order) are deemed to have taken place as at the date of the order for the purposes of ascertaining the asset’s value. Thus where an asset valued at £100,000 is transferred to the other spouse in exchange for £20,000, the CGT will still be calculated as though the value was £100,000, not £20,000. However, where transfers take place between separated spouses within the tax year of permanent separation, the transfer is still treated as being for nil gain / nil loss and no chargeable gain will arise on the transfer.
- All chargeable transfers between spouses following permanent separation and divorce are subject to capital gains tax but relief may be afforded to one or the other of them:
- After the tax year of permanent separation, each spouse is entitled to relief on their own principal residence.If either has more than one residence, then they can nominate which property should be considered their main residence and which will be afforded the relief.
- Until 5th April 2020, the party that left the property was entitled to relief for the 18 months prior to any sale of the property (s.223(1) Taxation of Chargeable Gains Act 1992), plus relief for the period that they lived in the property.
- Where one party moves out of the former matrimonial home, and they have been out of the home for more than 18 months post-permanent separation, this would trigger a CGT charge on disposal of their interest in that property.However if the leaving spouse transfers their interest in that home to the other spouse instead of disposing of the property in another way (.e.g sale), the former matrimonial home can be deemed the departed spouse’s principal residence from the date they left until the date of transfer or the date on which the transferee spouse ceases to use the former matrimonial home as their only or principal residence. The effect of this is that the transferring spouse’s home during that period (separation to transfer) cannot be considered to be a principal residence. This means that if they need to sell that second property at or around the same time, and since purchase there has been a taxable gain on that property, they will be obliged to pay tax on that gain. The parties have to comply with the provisions of s.225B Taxation of Chargeable Gains Act 1992 to acquire this relief:
- The disposal must be made pursuant to an agreement in contemplation of or otherwise in connection with the dissolution or annulment of the marriage of civil partnership, the parties’ judicial separation, or the making of a separation order, or their separation such that it is likely to be permanent; OR
- An order of the court granting a decree of divorce, nullity, dissolution or judicial separation is made or a financial remedies order under the Matrimonial Causes Act 1973 or the Civil Partnership Act 2004 is made; AND
- The property was from the point of separation and continues to be the only or main residence of the “left behind” spouse / civil partner; AND
- The departed spouse or civil partner has not given notice under s.222(5) or s.222A that another property or part thereof is to be treated as his main residence for any part of that period.
- If the parties let the former matrimonial home at any point prior to the disposal of their interest, lettings relief of up to £40,000 on each party’s gain was available until 04.06.2020.
- Any CGT payable was payable within the usual tax cycle and reported on a self-assessment tax return.The gain was to be reported by 31st January following the year of disposal and the tax due was to be paid by then.
As of 6th April 2020, the rules have changed. The effect for divorced and permanently separating couples is as follows:
- Where there is a sale or other disposal, rather than a transfer of the departed spouse’s interest to the resident spouse in accordance with the provisions of s.225B, then the period of 18 months’ exemption from CGT backdated from the date of sale / transfer is reduced to 9 months.Thus a sale that reaches exchange of contracts after 6th April 2020 can only have relief backdated to 9 months before that and otherwise for the period of residence. Any intervening period is chargeable;
- Lettings relief has been abolished, so for any period that the former matrimonial home is let, that will be chargeable to capital gains tax;
- CGT payable (not entirely relieved by principal private residence relief, not a CGT loss, not relieved by other losses brought forward and not covered by the annual exemption) now has to be declared by the filing of a land return and be reported within 30 days of the completion of the disposal together with a payment of the estimated tax.The tax is only an estimate as a party may be a borderline basic rate tax payer (18%) rather than 28% for a higher rate tax payer. The payment is treated as a payment on account until the final reckoning at the end of the tax year and a self-assessment tax return is filed. Penalties are payable on late filing and late payment of tax.
- The annual exemption has increased to £12,300 for 2020.
The overall effect of the changes can be stark to couples embarking upon separation. As is so often the case, advice should be sought prior to separation or otherwise shortly afterwards to consider all the implications. Tax advice from a specialist adviser is likely to be necessary where there is to be a disposal of chargeable assets. The former 18 month window, in particular, mitigated the likelihood of CGT being payable where divorce and financial remedy proceedings were begun and preferably finalised during that period. The reduction to 9 months after the date of permanent separation means that parties will have to act with cool heads and swiftness if they want to avoid obligations to tax on a sale or disposal to a third party, as it is unlikely that divorce and financial remedy proceedings would conclude within such a short timeframe.
This article on ‘Changes to capital gains tax reliefs when spouses and civil partners separate’ was written by Helen Brander. To enquire about instructing Helen or another member of our Family Finance Team, please contact our clerking team.