Tax Highlights. Draft Legislations to be Included Within the 2022/23 Finance Bill
In last week’s Tax news that you might have missed with other distractions (heat waves, Lionesses, travel chaos), HM Revenue & Customs has published a few new draft legislations that are due to be included within the 2022/23 Finance Bill.
Capital Gains Tax (CGT): Separation & Divorce.
Amongst these was one aspect that may make things a little less stressful for separating couples.
This clause makes a series of changes to the current rules that apply to transfers of assets between spouses and civil partners who are either in the process of separating or no longer living together.
What Does the Current Law Say?
The current Capital Gains Tax legislation (section 58 of Taxation of Chargeable Gains Act 1992) states that transfer of assets between spouses living together or between an individual living with their civil partner are made on a ‘no gain or no loss’ basis in any tax year in which they are living together, which means that any gains or losses from any transfer are deferred “until the asset is disposed of by the receiving spouse or civil partner, who will be treated as having acquired the asset at the same original cost as the transferring spouse or civil partner.”
When spouses or civil partners separate, no gain or no loss treatment is only available in relation to any disposals in the remainder of the tax year in which the separation happens. After that, transfers are treated as normal disposals for capital gains tax purposes.
The New Proposals
The new draft legislation proposes that instead of only having the period to the end of the tax year of separation, gifts up to 3 years following the year of separation can be made on a no gain no loss basis, and an unlimited time frame if made subject to a formal divorce agreement.
This essentially means that former spouses are given up to three full tax years (after the year they stop living together) in which they can transfer assets between themselves, and they also have unlimited time if the assets are the subject of a formal divorce agreement.
The current rule of just to the end of the tax year of separation has in the past led to what many consider to be unnecessary and even unjust tax charges arising so hopefully, this will be avoided under the new legislation.
It also introduces special rules that apply to those individuals who have maintained a financial interest in their former family home after divorce, and these rules apply when that home is eventually sold. These special rules refer to the spouse or civil partner who retains an interest in the former family home to be given an option to claim Private Residence Relief (PRR) when the home is sold.
The whole aim of the new draft legislation and changes is to make the entire process fairer for individuals who are separating or divorcing and are in process of distributing assets between themselves.
For full details please visit GOV.UK or contact the Elman Wall Tax Team by phone on 0207 7600 5667 or by email at TaxTeam@elmanwall.co.uk