Currently, if a couple transfers assets between them at any time after the tax year in which they separated, there may be tax payable. The new rules, which come into effect next year, will give couples three tax years from the split to split assets without triggering a tax bill. Couples will also have unlimited time to settle if those assets are part of a formal divorce agreement. Ownership rules are also changing.
These changes will allow those who have left the marital home but who have kept part of it will be able to apply for private residence assistance (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 proceeds of the sale as that applied during the transfer.
The change is welcomed by experts saying it will be a “huge relief” for those going through more complicated separations.
Indeed, it will give separated couples more time to come to an agreement.
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Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “When you’re going through a divorce, there’s already enough stress and pressure to carry on.
“Couples don’t need the added trauma of being on time to share their finances before the end of the tax year.”
Ms Coles explained that currently any asset transfer between the couple in the same tax year as the separation is considered a spousal transfer, so it does not trigger the capital gains tax.
However, if the couple are going through tax years while still working out the details, any transfer could potentially be subject to tax.
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Ms Coles said: ‘For anyone who separates late in the tax year or is slow to come to an agreement, it can be horribly expensive.’
The rule change follows a recommendation from the Office for Tax Simplification (OTS) in May last year.
His report “Simplifying Practical, Technical and Administrative Issues” looked at how capital gains tax rules apply to people who separate and divorce.
The OTS has recommended that the government extend the “no gain or loss” window on separation no later than the end of the tax year to at least two years after the event of separation.
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They also recommended that any reasonable deadline set for the transfer of assets pursuant to a court-approved financial agreement or equivalent should also be extended.
The government responded in November 2021 and agreed that the “no gain or loss” window on separation and divorce should be extended.
According to law firm Winckworth Sherwood, between 2019 and 2020, it took an average of 53 weeks from the filing of a divorce petition to the issuance of the decree absolute.
The law firm added that this time did not take into account that many couples separate before initiating divorce proceedings.
Commenting on the announcement, Laura Suter, head of personal finance at AJ Bell, said: ‘Before now it was a weird case where it’s better to get divorced in the new tax year in April because it gives you more time to sort out your finances. .
“Similarly, if you were ‘unlucky’ enough to get a divorce at the end of March, you would face a dash for putting your financial affairs online before the April 5 deadline.
“Clearly basing your divorce on the tax year system is impractical, so this solution will save you a lot of hassle and stress.”
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