The government published draft rules in 2022 to remove an unfair trap affecting couples who separate. Because of the political hiatus last autumn the new rules aren’t yet on the statute books. Where does that leave separating couples?
As you may know, where one spouse or civil partner transfers an asset to the other it counts as a “no gain, no loss” transaction. That means the spouse/partner transferring the asset, e.g. a building, is deemed to sell it to the other at a price equal to its cost. Consequently, there’s neither a capital gain nor a loss.
Trap. The no gain, no loss rule ceases to apply at the end of the tax year in which a couple permanently separate, whether or not they remain married or in a civil partnership.
Example. A couple who separated on 31 March 2023 had only five days in which to make use of the no gain, no loss rule. A transfer of an asset after 5 April 2023 would, if not for the new rules, count as if the transferor had sold it at market value, i.e. what a third party would be willing to pay for it. If that exceeds the cost of the asset the transferor would have made a capital gain even though they may not have received any payment for the asset. The new rules ease the tax position.
First new rule
There are two elements to the proposed new rules. The first is that separating couples will have three years from the end of the tax year in which they separate to make no gain, no loss transfers. For example, a couple separating on 1 July 2023 will have until 5 April 2027 to use the rule. That should allow enough time for most couples to make any transfers they need to.
Tip. Separations and divorces often don’t run smoothly and can drag on for several years. If you’re separated and the deadline is six months or less away, consider if a transfer of assets between you and your ex is needed and whether it would result in a capital gain. If so, a concerted effort to at least get the transfer done before the deadline should be made.
Second new rule
The second new rule simplifies the position where one spouse/partner leaves the home following separation. Private residence relief (which prevents all or part of capital gain being taxable where you sell or transfer your home) will cease to apply after nine months from the date of leaving the family home. However, they, subject to conditions, can elect for it to continue. The old rule allowed the election only if the absent spouse transferred their share of the property to their ex, whereas the new rule will allow an election where the property is sold to a third party.
Not yet law
The delay in the new rules becoming law has caused some concern for those who want to take advantage. While it’s true that strictly the new rules can’t apply until they become law (probably in July 2023), they include a clause that will make them effective for transactions made on or after 6 April 2023. Retrospective changes can sometimes be problematic if the rules are controversial and therefore at risk of being changed before they reach the statute books, but that’s not the case here. The draft rules are very likely to be unchanged when they are made law and so it’s safe to rely on them now.
Even though the new rules probably won’t be law until July 2023, they include a clause which means they will apply to transactions on or after 6 April 2023. In the meantime you can rely on them if you need to.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.