What is the current position regarding spouses/civil partners and CGT?
A person can transfer assets to their spouse or civil partner on a no gain, no loss basis up to and including the tax year in which they separate. For example, where a husband acquires shares for £20,000 and later transfers them to his wife, no gain and no loss will arise to the husband on his disposal of the shares (and the wife will have a CGT acquisition cost of £20,000) regardless of whether the shares are worth £15,000 or £25,000 at the date of transfer.
By contrast, if the couple had separated (by a deed of separation, by court order or, more usually, as a matter of fact) in the previous tax year but were still married at the date of transfer, the transfer would be deemed to have been made at market value. So, ignoring any allowances, if the shares were worth £25,000 at the date of transfer, the husband would have realised a gain of £5,000 on which he would have to pay CGT (with no sale proceeds to make the payment from). This differs from the inheritance tax position where all transfers between spouses and civil partners are exempt from tax up to the date of the decree absolute.
What issues does the OTS (Office of Tax Simplification) report address?
The highlighted broad and specific problems with the current position. Most significantly, it recognised that separating couples are unlikely to agree the division of their assets and actually make the transfers in the tax year of separation. Financial disclosure and reaching consensus as to each party’s needs can be a lengthy process (if an agreement is reached at all). Even if a couple separate early in a tax year (say, on 6 April 2021), they may still be a significant way off actually dividing the assets within 12 months, let alone if the couple separates towards the end of the tax year, say in March 2022.
The practical reality is that the current provisions do not help many separated couples to defer a CGT charge on the division of assets. CGT is often a further factor to consider in the separation of assets. The tax affects the total value available for division to achieve fairness and will frequently be a factor in negotiating the assets to be transferred.
More specifically, the report identifies two circumstances where the current rules give rise to particular problems. The first is the sale of the family property to a third party. If one spouse moves out of the family home at separation and the property is sold in a subsequent tax year, any gain on that spouse’s share of the property will be subject to CGT for any period to which principal private residence relief does not apply. The second circumstance is on share reorganisations in family businesses, where the tax charge can create funding issues.
What are the OTS recommendations and the government’s response?
The OTS has recommended that the no gain, no loss window should be increased to the later of:
- the end of the tax year at least two years after separation, and
- any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court (or equivalent processes in Scotland)
In its response to the OTS, the government agreed that the no gain, no loss window on separation and divorce should be extended and announced it would consult on the detail over the course of 2022. However whilst the government did accept that the window should be extended, it did confirm what it would be extended to or when the change would happen. These things move slowly, so it is unlikely that it will be soon.
If the recommendation is implemented, then it will certainly help separating families, so we will be watching for developments.