Capital gains tax changes announced: Move to reduce risk of ‘horribly expensive’ bill

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Currently, if a couple transfers assets between them any time after the tax year in which they separated, there may be a tax to pay. The new rules, which come into play next year, will give couples three tax years from the split to share assets without triggering a tax bill. Couples will also be given unlimited time to settle if those assets are part of a formal divorce agreement. The rules around property are also changing.

These changes will allow those who moved out of a marital home but kept a share in it will be able to claim Private Residence Relief (PRR) if the property is sold.

Those who have transferred their interest in the property to their ex will be able to apply the same tax treatment to the sale proceeds as applied when they transferred it.

This change is welcomed by experts stating that it will be a “huge relief” to those who are going through more complicated separations.

This is because it will give separate couples more time to come to an agreement.

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Sarah Coles, senior personal finance analyst, Hargreaves Lansdown said: “When you’re going through a divorce, there’s already enough stress and pressure to be getting on with.

“Couples don’t need the added trauma of being on the clock to split their finances before the end of the tax year.”

Ms Coles explained that at the moment, any transfer of assets between the couple in the same tax year as the separation is considered to be a transfer between spouses so it doesn’t trigger Capital Gains Tax.

However, if the couple crosses tax years while they’re still sorting out the details, any transfer could potentially be subject to the tax.

Ms Coles said: “For anyone who splits late in the tax year, or takes a while to come to an agreement, this can be horribly expensive.”

The rule change follows a recommendation from the Office for Tax Simplification (OTS) in May last year.

Its report “Simplifying practical, technical and administrative issues” looked at how the Capital Gains Tax rules apply to individuals who separate and divorce

The OTS recommended that the Government should extend the “no gain no loss” window on separation to later than the end of the tax year to at least two years after the separation event.

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They also recommended that it should also be extended for any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent.

The Government responded in November 2021 and agreed that the “no gain no loss” window on separation and divorce should be extended.

According to the law firm Winckworth Sherwood, between 2019 and 2020 it took an average of 53 weeks from a divorce petition being issued to the pronouncement of Decree Absolute.

The law firm added that this time did not account for the fact that many couples actually separate before issuing divorce proceedings.

Commenting on the announcement, Laura Suter, head of personal finance at AJ Bell said: “Before now it’s been a bizarre case where it’s more beneficial to get divorced in the new tax year in April, as it gives you more time to sort your finances.

“Likewise if you were ‘unlucky’ enough to get divorced in late March you’d face a dash to get your financial affairs in line before the April 5th deadline.

“Clearly basing your divorce around the tax year system isn’t practical, so this fix will avoid a lot of hassle and stress.”

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