QUESTION: My husband and I are currently considering separating. Surely there are no tax implications on dividing our assets as we are still husband and wife?
ANSWER: Under the current capital gains tax (CGT) regime in the UK there are rules in place to allow for transfers of assets between spouses to be deemed to take place at no gain/no loss for capital gains tax purposes. That is to say that they will not incur a CGT liability upon transfer of assets such as property, land and shares. The spouse receiving the asset will be deemed to have acquired the asset at the same base cost as their spouse who transfers the asset.
The previous rules meant that in order to qualify for the favourable spousal transfer rules the couple must transfer the asset within the tax year of the separation. The tax year runs from April 6 to the following April 5. After this point transfers are treated as taking place at market value due to connected person rules and that sometimes created unexpected tax bills for separating couples.
That often caused difficulty as, depending on the date of separation, the window in which to make such a transfer could have been very short.
The previous rules meant that should a couple separate on April 6 they had almost a full year to transfer assets without potentially realising a capital gain and incurring a tax liability. Conversely, a couple who separated on April 1 would only have had a few days in which to utilise the no gain/no loss spousal transfer.
Following a consultation the government introduced legislation, whereby from April 2023 there were amendments to the rules such that separating couples are given:
· Up to three years after the year of separation in which to make transfers and realise no gain or loss.
· An unlimited period where the transfers are made in accordance with a formal divorce agreement or court order.
This allows couples, who are potentially already going through a very difficult period, more time in which to divide assets upon separation without fear of incurring tax liabilities.
More often than not the main asset that is transferred between separating couples is the marital home and this is where the changes to CGT rules will be most welcomed by those affected by the restrictive rules currently in place.
Principal private residence (PPR) relief is a tax relief that can be applied on the sale of a main home and can have the effect of reducing a gain realised on the sale of property to nil, eliminating any CGT liability.
Previously, upon separation the former spouses could transfer the marital home to one another utilising the no gain/no loss rules, however, this was only applicable in the tax year of separation. Under the new rules and the extension of the time limits in which to make transfers the departing spouse can claim PPR as if they had remained in the property, subject to them not having another PPR, within three years of separation.
Furthermore, the legislation introduced special rules for individuals who have maintained a financial interest in their former marital home following separation. Where a spouse still holds an interest over the property in which they have already transferred their share to their former spouse PPR may still be claimed on the same proportion as applied at the original disposal when the property is sold to a third party.
If you require any further information on the new CGT rules for separating couples, or any other CGT queries, please do not hesitate to get in touch.
Shane Martin (s.martin@fpmaab.com) is director at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies
