The government is to introduce reforms which will correct one of the great tax injustices. The change in the law will reduce the pressure on separating couples to settle ownership of their asset quickly or face a capital gains tax (CGT) bill. What’s the full story?
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.
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.
Time to spare example
Janet and John decided to separate and permanently parted ways on 1 May 2021. 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 John agrees to give his share of the second home to Janet. In exchange she will give him her shares in the company. They have until 5 April 2022 to make the transfers and use the no gain, no loss rule to avoid a CGT bill.
No time to spare example
Jack and Diane are in an almost identical situation to Janet and John. The only difference is that they permanently separate on 28 March 2022. 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.
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.
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, Jack and Diane would have until 5 April 2023 instead of 2022. All the government has said so far is that it “will consult on the detail over the course of the next year”.
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.
The government will consult on the no gain, no loss rule for CGT. Currently it ends on the 5 April in the tax year in which a couple separate. If that’s near the end of a tax year it can put impossible time restrictions on the transfer of assets between each other without CGT biting. The time allowed will be extended but no date has been set for this change.
Brona MacDougall, Tax Partner