New CGT deadline for separating couples

Tax break for couples

Married couples and civil partners are in a privileged position when it comes to capital gains tax (CGT) planning. One spouse/partner can transfer an asset to the other without it counting as an event which needs to be considered for CGT purposes. This is known as a “no gain, no loss” transaction. For example, if one spouse is contemplating selling shares which would result in a tax bill because they have no CGT exemption (currently £12,300) left, but their spouse does, they can transfer the shares to them (and the no gain, no loss rule applies) and they in turn can sell them and use their exemption to reduce or eliminate the CGT bill.

End of the no gain, no loss rule

The no gain, no loss rule only applies until the end of the tax year in which a couple is married or in a civil partnership and they are living together. HMRC treats a couple as not living together from the date they permanently separate. This is when under the current CGT rules inequity can hit. The following two examples illustrate this.

Example - time to spare. Jack and Jill decided to separate and permanently parted ways on 1 May 2022. They each own a half share in their personal company and a second home. Both these assets have substantially grown in value since they bought them. This means if they are sold or transferred in a situation where the no gain, no loss rule does not apply, the gain will be taxable. After separating Jack agrees to give his share of the second home to Jill. In exchange she will give him her shares in the company. They have until 5 April 2023 to make the transfers and use the no gain, no loss rule to avoid a CGT bill.

Example - no time to spare. Ali and Amira are in an almost identical situation to Jack and Jill. The only difference is they permanently separate on 28 March 2023. If they want to transfer assets from one to the other and make use of the no gain, no loss rule they have just seven days in which to do it. After that if one transfers an asset to the other it will be treated as if it were a sale at the asset’s market value, i.e. the amount a third party would be willing to pay for it, and the gain is taxable.

Tax versus life decisions

It’s unrealistic to expect couples to be aware of this tax trap, especially at a time when their lives are likely to be substantially disrupted. When the dust settles on their separation it might be too late to reorganise ownership of their assets without having to factor in a hefty CGT bill.

No change yet

The government has agreed that a change will be made to extend the time separating couples have for the no gain, no loss rule to apply. Unfortunately, there are no details as yet. The suggestion is that the rule should apply until the end of the tax year following that in which separation occurs. For example, Ali and Amira would have until 5 April 2024 instead of 2023. All the government has said so far is that it “will consult on the detail over the course of the next year” . We’ll keep you posted!

Forewarned is forearmed. Until the rules are changed couples going through difficulties should bear in mind that if they separate near the end of the tax year they may have little time in which to reorganise ownership of any assets they own if they wish to avoid a CGT bill.