• Date

    01 Aug 2022
  • Category

    Tax

Capital Gains Tax relief for separating spouses and civil partners

In order to allow for technical consultation, the government has published draft tax legislation ahead of potential inclusion in the Finance Bill 2022-23.

Andrew Cockman, Tax Director, looks at the key takeaways of the draft legislation from a personal tax perspective below.

Capital Gains Tax (CGT): Separating spouses and civil partners

Last November the government responded to the Office of Tax Simplification’s (OTS) recommendations on the CGT treatment when spouses and civil partners separate, agreeing that the ‘no gain / no loss’ window should be extended. The OTS had suggested that this treatment should be extended to the later of: (i) the end of the tax year at least two years after the separation event; or (ii) any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent processes in Scotland.

Draft legislation has now been published for technical consultation. Under the proposals, in relation to disposals on or after 6 April 2023, the parties will be given up to three full tax years in which to make no gain / no loss transfers of assets between themselves when they cease to live together. It is proposed that there will be an unlimited period of time if the assets form part of a formal separation agreement.

Ultimately, the new rules, which are scheduled to come into effect from next year, would allow separating couples three tax years to share assets before a tax bill would be generated. As such, where a separation may be particularly difficult, the announcement means more time to finalise an asset share agreement.

CGT: relief on disposals of joint interests in land

The government also announced in November last year that it intends to expand the scope of CGT roll-over relief to include Limited Liability Partnerships (LLPs) and Scottish partnerships. With this in mind, draft legislation has been published making changes to roll-over relief and private residence relief to ensure that LLPs and Scottish partnerships which hold title to land are included.

Inheritance Tax (IHT): Dormant Assets Scheme

As well as the CGT proposals, further tax provisions for Income Tax and IHT in connection with the Dormant Assets Scheme have been put forward.

As background, the Dormant Assets Scheme has been in operation since 2011 and enables banks and building societies to channel funds from dormant accounts towards good causes. The Scheme was expanded in 2022 to include assets in the insurance and pensions, investment and wealth management and securities sectors.

The published draft legislation introduces changes to Income Tax and IHT to make sure assets transferred to the reclaim fund which are subsequently returned, receive the correct tax treatment.

Overview

The consultation in relation to the proposed changes to the CGT treatment on divorce is particularly to be welcomed. The ICAEW REPRESENTATION 105/20: OTS CAPITAL GAINS TAX REVIEW summarised the current position succinctly (paragraph 9): ‘The current system is both capricious (since the date of separation will determine how long the individuals have to benefit from [No gain /No loss] treatment with it ranging from a day to a year) and unfair. The financial settlement part of a divorce is often the most difficult area after care of any children (and generally there is a link between the two issues). It often comes as an unpleasant surprise to taxpayers that after the tax year of separation [No gain /No loss] does not apply and the tax issues unnecessarily complicate the negotiations required to reach financial settlement’.

The supporting documents have been published, as well as a number of tax-related consultations and summaries of responses to consultations, and they are available on the government website. The announcing statement made by Lucy Frazer, Financial Secretary to the Treasury, on July 20 is available here.

We are here to help

For further information regarding the proposed legislation changes to Capital Gains Tax and Inheritance Tax, please speak with your usual Azets contact or a member of our Tax team.

About the author

Andrew Cockman Photo

Andrew Cockman

Director - Tax Advisory Tamworth
View all news & insights

You might also be interested in