The draft Finance Bill 2022-23, released on 20 July, has attempted to simplify and make fairer the issue of Capital Gains Tax (“CGT”) for divorcing spouses and civil partners. The headlines are as follows:
- No gain/no loss treatment extended to three years following the year of separation or date of decree absolute if earlier than three years (currently it is one year, which can be an issue);
- No gain/no loss treatment with an unlimited time frame if the assets are subject to a formal divorce agreement (section 225B(2)(a) or (b) – effectively a consent or court order);
- Where a spouse has retained a financial interest in a property they will be able to claim Private Residence Relief (“PPR“) when the property is sold or transferred to a third party. This replaces the rule under section 225B that PPR applies on a transfer between spouses (now redundant);
- Where spouse A transfers to B subject to a charge in favour of A and the property is sold on a trigger event such as the youngest child turning 18. A does not get their share of the sale proceeds until years later and the disposal date for A is deemed to be the date of original transfer on a no gain/no loss basis. At present this is arguably more complex as spouses may be able to claim PPR for the period of occupation by B but then potentially have some CGT – different lawyers differ here!).
The consultation on the draft legislation ends in September. The provisions will take effect once approved (or as amended) on 6 April 2023, which for the purposes of advice, is very soon. CGT will thereafter become less of an issue for couples separating, on a par with SDLT which does not arise on a transfer of property order from one spouse to the other (in this jurisdiction at least – it does elsewhere!). There may well be merit in some couples waiting to finish a deal until April 2023, and whether this is appropriate will be case sensitive. Of course, the recipient of the property will still take it at base cost and so CGT will be due on disposal.
This is a welcome change (one wonders what the estimated cost of this is to the taxpayer and how any loss of revenue will be recouped from couples, as it surely will be). There is, however, now a negligence risk for family lawyers who do not advise on this change in relevant cases (in the same way that breach of duty, if not causation, was proven in the case of Williams v Thompson Leatherdale (a firm) & Anor, where the advisers were aware that the House of Lords was due to hear and decide the seminal case of White v White on equal sharing, but did not advise properly in that context).
So even though the legislation is only in draft, the changes are relevant now.