Changes to the tax treatment of transfers on divorce
Tax On Divorce » December 7, 2021
What changes has the Government announced?
On 30 November 2021, Lucy Frazer, the Financial Secretary, confirmed that the Government accepted the Office of Tax Simplification’s recommendation that the ‘no gain no loss’ window on separation and divorce should be extended and that the Government will consult on the detail over the course of the next year. The current proposal is that the Government should extend the ‘no gain no loss’ window on separation 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.
So far, we have not been provided any further details as to when the consultation will open or how to contribute to the consultation.
In the immediate term, we know that the Government have said that they are likely to make this change, but we do not know when this change will take place. Typically, consultations are open for three to six months. The Government then considers the consultations and draft legislation is produced. This is usually shared with professional bodies for comments and then the Bill passes through the House of Commons and the House of Lords. The Finance Bill 2021 received Royal Assent in June 2021, therefore, it is possible that these changes could be implemented as soon as Finance Bill 2022.
What would the changes mean?
These changes would mean that any transfers that take place between a divorcing couple will not incur any immediate Capital Gains Tax (CGT) charge. Any assets would move from one party to the other with inherent gains and losses. Therefore, once these changes come in, the most important thing to keep in mind is the net value of the asset (once inherent CGT has been calculated).
Importantly, this change does not change the amount of eventual capital gains tax payable. It just changes who is responsible for the payment and when the payment is due.
Current rules after tax year of separation
The person transferring the asset pays the CGT. It is payable within 60 days (for property).
New proposed rules
The person receiving the asset pays the CGT when they sell or transfer the asset in the future.
What do I need to tell my clients?
Given how quickly these measures could be implemented, it is important to notify your client of these changes (or point them to this blog!). At the moment, we have no timeline of implementation and we should have some clarity of this in the new year. In essence, at the moment if they transfer assets to their spouse and it is after the tax year in which they separated, they are likely to have a CGT liability.
If the change is implemented as soon as April 2022, clients may wish to wait until that date to complete any transfers so that no tax is payable on the transfer of the assets.
Is it all good news?
We will publish further on this in the coming weeks but in brief, it is good news as once it is implemented clients who transfer assets will not have an immediate CGT liability. The bad news is that some clients prefer to crystalise the gain ahead of the transfer (ie to pay their share of the tax) and then the receiving spouse receives the asset with only their CGT liability to pay on future sale or transfer.
It will also be interesting to see if there are changes to the loss provisions. At the moment, if you transfer an asset in the tax year of separation with a loss, that loss can only be offset against gains on transfers to the same person. This usually means that the losses are lost which in turn increases the transferor’s CGT liability on future sales as they cannot use their losses.
What should we be asking for in SJE reports?
Given this recent change I would include a standard question such as ‘please comment on how this advice would change if the no gain no loss rules are implemented in April 2022?
What next?
We will be providing updates on this over the coming months and will share with you when the consultation opens in case you wish to contribute. Most communications will come via our newsletter, so please do subscribe if you would like to receive these updates.