On 20 July 2022, HMRC published draft legislation for the Finance Bill 2022-23, which, if brought into effect, would change the rules around Capital Gains Tax (CGT) for separating spouses and civil partners. 

The proposed changes are extremely positive. The government has recognised that separating spouses and civil partners need longer than the tax year of separation to transfer or divide their assets. This is particularly the case where the parties’ finances are complex, or where tensions are high.  

Tax year of separation

The current rules, provided for in section 58 of Taxation of Chargeable Gains Act 1992, give spouses and civil partners until the end of the tax year in which they separated to take advantage of the beneficial tax rules when dividing up their assets. If an asset is transferred between spouses within the tax year of separation, that disposal is treated as neither a gain nor a loss for CGT purposes and, as such, no CGT is payable. After the end of the tax year of separation has passed, transfers are currently treated as normal disposals for CGT purposes and CGT is payable if there has been a gain.

The new draft legislation proposes to change this, to give spouses and civil partners up to three tax years after the tax year in which they separate and before divorce, dissolution or separation to take advantage of the no gain or no loss rules for separating spouses and civil partners. The no gain or no loss treatment will also apply for an unlimited period to assets that separating spouses and civil partners transfer between them as part of a formal agreement.  

Principal Private Residence (PPR) relief

Another proposed change is that, under the new draft legislation, a spouse or civil partner who retains an interest in the former matrimonial home (FMH), but who agrees to move out of the FMH upon separation, will have the option to elect to treat the property as if it had remained their only or main residence until the disposal of the FMH for the purposes of PPR relief. This relief is not currently available. 

The new draft legislation also deals with the situation where instead of retaining their interest in the FMH a spouse or civil partner has transferred this interest to their ex-spouse or civil partner and it has been agreed/ordered that they should receive a percentage of the sale proceeds when the FMH is eventually sold.  The new draft legislation will allow them to apply the same tax treatment to those proceeds, so that they can benefit from PPR even if they do not continue to own the property post-separation.

Next steps for the draft legislation

The consultation on the draft legislation closes on 14 September 2022. The proposed changes are more generous than a recommendation made by the Office of Tax Simplification in 2021, giving couples more time to reach a financial settlement and transfer assets between themselves without incurring a possible CGT charge.  If brought into effect, this will be a very positive change for separating couples, who are often under immense pressure to minimise their tax liabilities upon divorce/dissolution.    

The changes are due to come into effect from April 2023.