Proposed Changes to Capital Gains Tax

26 July 2022

For Separating Spouses or Civil Partners

HMRC have announced suggested changes to the capital gains tax position on the transfer of assets between spouses going through a divorce. The intention is to make fairer the rules that apply to spouses and civil partners who are in the process of separating. This follows on from the OTS report into how capital gains tax can be simplified. The main proposals are as follows:

• separating spouses or civil partners to be given up to three years after the year they cease to live together in which to make no gain or no loss transfers
• no gain or no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement
• a spouse or civil partner who retains an interest in the former matrimonial home to be given an option to claim Private Residence Relief (PRR) when it is sold
• individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold, be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the home to their ex-spouse or civil partner

For US taxpayers, it is important to also consider the US tax rules relating to divorce which remain unchanged.  Generally, for US purposes no gain or loss is recognized on a transfer of property to a spouse within 12 months of the end of the marriage or when the transfer is incident to the divorce.  A transfer is typically considered to be incident to a divorce if it is made pursuant to a divorce decree and occurs within 6 years of the cessation of the marriage.  This rule does not apply where the former spouse is a non-resident alien.

We will keep you updated on these changes, if and when they come into effect.

For more information on Capital Gains Tax, read our expertise page.